Clouds helping start-ups grow, but lack enterprise capability, investors say

Cloud computing is making it easier for start-ups to develop new technology, but once companies grow beyond a certain size they may find current cloud technologies do not meet their requirements, tech investors said during Interop in Las Vegas this week.

The ability to spin up multiple virtual machines on a hosted cloud computing service like Amazon EC2 makes testing new software products much simpler than in the days when companies were forced to provision their own servers, venture capitalists said during a panel discussion on cloud computing.

FAQ: Cloud computing, demystified

"You can iterate a lot and get feedback faster," said Ping Li, an investor at Accel Partners. "You're able to experiment in the wild, as opposed to experimenting in the labs or in your head."

But the cloud is designed for the lowest common denominator, Li said. Eventually, a company's technology becomes so complex that it must be customized to fit the needs of specific applications, and those levels of complexity are not yet available in the cloud. And at certain economies of scale, it may not be cheaper to rent storage or server space from Amazon than it is to host it internally, investors said.

"The higher levels of complexity in the cloud stack isn't there yet to do the things a highly tuned application like Facebook and Twitter needs to do," Li said. "That's not to say the cloud won't get there, but the cloud gap exists."

That's one of the reasons enterprises are interested in building so-called private cloud networks, which are managed internally but use a similar architecture as public cloud services.

"The gap between what IT does behind the firewall and what is done in the cloud is pretty wide," said Guy Horowitz, a principal investor at Gemini Israel Funds. Horowitz also notes that cloud providers are typically not offering service-level agreements worthy of the enterprise, a problem that panelists said is unlikely to be solved anytime soon.

"There's a reason these SLAs have no teeth," Horowitz says. "If they were able to guarantee uptime and performance they would be selling it. ... It's not in the best interests [of cloud vendors] to provide specific SLAs that can be enforced."

Although cloud computing is one of the hottest parts of the technology market, investors said there is risk in choosing the wrong cloud companies to invest in. Many start-ups are building technology that enhances the capabilities of Amazon EC2 and other cloud services, but they run the risk of Amazon developing the same functionality and eliminating the need for the third-party vendor.

"We all ask, is this a feature or is this a company? If it's a feature, Amazon will innovate on it," said Allan Leinwand of Panorama Capital.

That's not always the case, though, Li said. Amazon's core expertise is not enterprise software, even though it is the most prominent vendor offering cloud-based virtual server and storage capacity.

"Amazon's not a software company," Li said. "We've seen them not do as well building layers on top of the stack as you would think."

Venture capitalists have one goal when they invest in start-ups: to make money through either an acquisition or IPO. There are many companies that seem poised to buy cloud start-ups, but the investors disagreed on which companies will do the buying.Rackspace and GoGrid are likely to buy new technology to better compete against Amazon, Horowitz said. 

Mark Fernandes, managing director of Sierra Ventures, said IBM, CA, HP, Dell and Microsoft will also be aggressive in the cloud acquisition market.

Fernandes also contended that AT&T and Comcast will make cloud buys, a notion Leinwand disagreed with. Service providers are unlikely to get in the enterprise software game, Leinwand said, and may look at AT&T's Synaptic cloud service as a warning signal.

"AT&T announced Synaptic. Name a customer," Leinwand said.

Oracle is a company to watch out for in the cloud M&A market, he said.

"Oracle has been relatively quiet in this space and that's going to change," he said.

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Read more about data center in Network World's Data Center section.

This story, "Clouds helping start-ups grow, but lack enterprise capability, investors say" was originally published by Network World.

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