Tech startups try to cut cloud computing costs to solve budget problems

The tech industry is on the brink of a historical breakdownand startups are save costs to survive† But to avoid a worst case scenario that includes: laid offsome smart startups are looking for reduce their cloud computing spend†

For many, the money spent on cloud services from Amazon, Microsoft and Google is one of the biggest and most important items on their budget, according to several venture capitalists. Startups use cloud computing to power the services they offer to businesses, such as music

to stream

and data storage.

The cost of powering apps and services rose earlier during the pandemic as people started using their phones like never before and more companies moved their operations to the cloud to keep up with rising usage. The cloud service providers, in turn, reported: blockbuster earnings most of last year.

Now tech companies are losing weight due to fears of a

recession

, and they’re looking at the costs they can control, including the all-important cloud. In some cases, savings from reducing cloud spend may be enough to save companies from layoffs, but it’s not a one-size-fits-all solution and not every business would benefit.

“People will probably assume that the market situation means people are going to cut costs and expenses,” Joe Duffy, co-founder and CEO of Pulumi, a startup that helps developers manage applications in any cloud, told Insider. “Honestly, the money we and our customers spend on the cloud is among the money best spent.”

Andreessen Horowitz

Still, it’s something to think about before laying off the staff, said Martin Casado, a general partner at Andreessen Horowitz.

“It’s easier to deal with cloud costs,” he told Insider, “than it is actually hurting the business by reducing the number of employees.”

Negotiations have become ‘ruthless’

Startups that rely on cloud services to run their applications often buy credits at the beginning of their contract and spend it throughout the life of the contract, said Cack Wilhelm, an enterprise sales veteran and now a general partner at IVP, a late-stage venture and growth equity firm. In recent years, more tech companies have opted for a “pay-as-you-go” plan, where they are billed for the computing resources they use or the amount of storage they subscribe to.

But the market decline has led more companies to push suppliers on prices, Wilhelm said. It also accelerates a shift in the cloud industry, where startups hold more dominion about cloud giants such as Amazon, Microsoft and Google.

“Companies have become accustomed to being ruthless when negotiating contracts,” Wilhelm said.

IVP

Doug Schneider, the CEO of 2nd Watch, an IT services company that helps businesses manage their cloud services, said customers would also threaten to move their data from Amazon, Microsoft or Google to one of their competitors to get lower prices. .

While startups have relatively low cloud costs to begin with, those costs increase exponentially as they grow. Airbnb, for example, has a $1.2 billion multi-year contract with Amazon Web Services.

But the bigger the customer, the more influence it has, says Soma Somasegar, president of Madrona Ventures in Seattle.

“Startups that have reached a certain level of scale will have a greater bargaining power with the cloud providers to say, ‘I’m going to consume so much of your cloud. How do I get the best possible price for you and for me?’ said Somasegar, who… LED his company’s investment in Snowflake, a cloud data warehousing company, in 2017.

The proliferation of early-stage vendors such as Snowflake, Databricks and Datadog, who offer their products through multiple cloud providers, has also give customers more control over the cloud giants† Because those customers use more than one cloud provider for their IT infrastructure — a model commonly referred to multi-cloud — they gain even more bargaining power.

Startups want to optimize, not shrink

Startups also have other tools to shave cloud costs.

many buy”cloud cost optimizationsoftware that helps them select and allocate the right cloud resources to an application, preventing them from buying more computing resources than they need, said Kyle Harrison, a general partner at Contrary Capital, a venture startup company that also helps in managing a community of technical talent.

For example, Zesty, a startup that allows companies to automatically tailor their cloud infrastructure to the needs of their application, said its client Heap hired four engineers with the $1 million it saved on cloud computing.

A cottage industry of companies selling software for cloud cost optimization has blossomed in the downturn. This year, vendors such as Finout, Harness, and Cast have collectively raised more than $250 million in funding. And Intel bought an Israeli service provider, Granulate, for $650 million in March, TechCrunch reported†

Companies are also turning to their own employees to optimize cloud costs.

sumologica

Experts in ‘FinOps’ or cloud finance management, helping companies adopt best practices that can reduce their overall cloud spend. For example, the data analytics company Sumo Logic has a dedicated team of engineers and data scientists focused on controlling Amazon Web Services costs. But the startup Observe, which makes tools to monitor all the components of an app, says the responsibility lies with all engineers, not just FinOps employees.

“The engineering team is ultimately responsible for optimizing that to get where it needs to be,” said Ross Lazerowitz, chief of product at Observe. “We’re trying to use our product for that.”

Cut at your own risk

Certainly, the benefits of reducing cloud spend are limited.

Coinbase, whose stock has fallen nearly 80% in the past six months, cut its spending on cloud services like AWS and Datadog in May, according to a internal memo seen by The Information. But the decision didn’t stop the crypto treasure lay off about 1,100 employees in June amid a crypto sell-off.

Deep cuts in cloud costs could also cause catastrophes, investors say.

Patrick Fallon/Getty Images

Many businesses rely on the cloud to run their products and services, especially those that use significant computing resources, such as those involved in machine learning and data analytics. If they don’t buy enough cloud credits from vendors, they could experience outages or other performance issues when usage peaks, Wilhelm said.

That’s a scenario cloud startup Pulumi wants to avoid. The company saw its cloud bill rise from $20,000 to $80,000 in one quarter due to an increase in customer activity, said Duffy, its CEO. Rather than panicking or cutting back on cloud computing altogether, it used its own product to change the way it allocated computing resources.

Ultimately, the cloud is just too important for some startups to cut corners.

“If we wanted to cut costs, we wouldn’t start there,” Duffy said.