How the cloud is cutting dependence on venture capital investment

A decade ago, investors funded projects. Today, venture capital funds are scaling up already successful companies. This shift isn't just because VCs have become more rational in their investments. Plenty of startups just don't go looking for cash. The main reason startups can postpone or turn down VC money is cloud computing and SaaS.

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A good then vs now comparison is to look at supercomputing.

A few years back, grid computing startups attracted major VC investments. Univa was founded in 2004 and took on an $8 million round of Series A funding in 2005 to get its product out the door. Around the same time, Jason Stowe was in the process of founding the high-performance computing startup, Cycle Computing. Cloud computing had not yet become an overhyped buzzword, but Stowe knew that the technology landscape was changing. Stowe decided to see if he could skip VC funding altogether.

He launched Cycle Computing not with $8 million (£5 million), but with $8,000 of his own money. The low development costs translated into lower costs to end users, which, in turn, made the process of acquiring customers that much easier.

"Last summer, we spun up a 30,000-core supercomputer cluster [using Amazon EC2] for a pharmaceutical client. We ran it for eight hours, using it for drug discovery, and then shut it down. The bill to the client was $8,500," Stowe said. "Today, any biotech startup can access something that would have cost $10-15 million to build yourself just a few years ago."

Zohar Alon, CEO and co-founder of cloud security startup Dome9 tells a similar story. "When launching my first startup in 2006, equipment was required and it was expensive. Servers in the office and, of course, hosted long-term leased servers were needed. We had to operate a lot of the systems ourselves: source control, help desk applications and a corporate wiki, and it's not just the increased upfront cost that hurts you, but the energy wasted on managing, maintaining and securing these systems."

Alon contrasted that experience with the founding of Dome9. "We relied on cloud and hosted services for everything we could. We used [co-founder Roy Feintuch's] living room as our base for the first nine months, until a friend volunteered a 20'x20' space where we stayed until we got funding," he said. "The distributed nature of SaaS services allowed that to happen, and many of the tools we used when we started the company are the same ones we're using today."

Alon provided a long list of cloud and SaaS services that helped him start his company on a tiny budget. These include Rackspace for testing and development, Pingdom for service monitoring, Loggly for app monitoring and hosted repositories, MailChimp for customer newsletters and Uservoice for support and help desk services.

In other words, tools critical to the entire business cycle, from development to testing to sales and marketing and on through to customer support, can now be consumed on-demand as services.

Outsourcing means you don't have to be technical

When lawyers Tom Zuber and Olivier Taillieu founded LawLoop.com, not only did they take advantage of the cloud, but they also outsourced much of the software development to overseas coders.

"I doubt we could have done this 10 years ago," Taillieu said. "We're entirely self-funded. With the cloud and outsourcing, startups can take advantage of huge economies of scale, while also having the ability to work without borders. Through the cloud, enormous processing power is now in the hands of people all over the world."

All of this adds up to a much more level playing field for potential entrepreneurs. If you see a problem and think you know how to solve it, you can sign up for some cloud services, hire some cheap overseas coders and be on your way in no time. "People think about entrepreneurship at a much younger age today," VC Farrington said. "There are more role models and they aren't as remote as past success stories."

The democratisation of entrepreneurship doesn't mean VCs should start looking for other work. At the early stages, VC networks can be instrumental in finding and attracting talent. Later, the cash infusions are necessary to build out sales and marketing.

"With barriers falling everywhere, it's harder to differentiate yourself," Farrington said. "It still takes money to break through the clutter, scale up sales and marketing and demonstrate to the market that you are substantially different from competitors."

Most successful startups will still take on VC money at some point. What's different today is that they have more options, can put it off longer and often don't need it until they've already achieved a degree of success.

That's a good thing all around. For startups, they get better valuations. For VCs, the odds that their investments will pay off are better. And for everyone else, the cloud is ushering in a golden age of innovation.

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