Founders, Investors and the Cloud Dilemma!

It’s no secret that in the venture capital world today, the average investor expects the startup to be Cloud-native.

Investors prioritise short-term return (i.e. exist) over long-term sustainability. The Cloud “route” essentially means that IT CapEx becomes OpeEx and therefore better ROI to the investor – assuming the startup will both survive and exit.

In addition, being on the Cloud means that the founder/CTO can transfer the risk and blame the provider when things go south.

Sure, there are scenarios where the Cloud option does indeed make sense. For instance, Netflix has completely ditched their infrastructure and moved to AWS. It makes sense because the demand on their services fluctuates a lot (e.g. spikes when a new popular movie is released). If Netflix provision for the “worst-case” scenario, they would have billions worth of infrastructure sitting idle most of the time.

So, does this mean every tech startup should do the same?

I think it’s crucial for startups (and their investors) to understand the business model and the technical and financial implications. Most tech startups follow a “freemium” business model where the vast majority of users are “freeloaders”. The conversion rate can be as low as 1% but the startup still needs to cover the IT cost of the remaining 99% somehow.

One might say “pass the cost down to the paying customers”. The problem with this strategy is that unless you have a complete monopoly (unlikely for startups), you will become uncompetitive. It’s also unfair to the paying customers!

In my opinion, I think a key advantage of hosting your own IT infrastructure is freedom! Using cloud services is pretty much like playing with Lego blocks. You are restricted by the size and shape of the blocks (that you can afford). If you are building a novel and innovative product, you will need all the freedom you can get.

Another key advantage is improved customer experience. Why do you think most startups websites are frustratingly sluggish? It’s because they use the “cheapest” hosting options, which tend to be way oversubscribed.

At REXSMART we host all of our services on-prem. Despite the huge database and bespoke AI, our average response time is well under 200 milliseconds, and the availability is consistently above 99.99%.

Let’s face it! Most tech startups sell the £1 for 90p until they either get acquired, or in most cases run out of cash and pull the plug.

01-05-2024