The tech industry is on the brink of a historic slump, and startups are slashing costs to survive. But to avoid a worst-case scenario that includes layoffs, some savvy startups are looking to lower their cloud-computing spending.
For many, the money spent on cloud services from Amazon, Microsoft, and Google amounts to 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
and data storage.
The costs of powering apps and services grew earlier the pandemic as people turned to their phones like never before, and more enterprises moved operations to the cloud to keep up with soaring usage. The cloud-service providers, in turn, reported blockbuster earnings most of last year.
Now, tech firms are slimming down over fears of a
, and they’re taking a closer look at costs they can control, including the all-important cloud. In some cases, savings from lowering cloud spending may be enough to spare companies from layoffs — but it isn’t a one-size-fits-all solution, and not every company would benefit.
“People will probably assume the market situation means people are going to start slashing costs and slashing spend,” Joe Duffy, a cofounder and the CEO of Pulumi, a startup that helps developers manage applications on any cloud, told Insider. “Honestly, the money we and our customers spend on cloud is some of the money most well spent.”
Still, it’s something to consider before cutting staff, Martin Casado, a general partner at Andreessen Horowitz, said.
“It’s easier to tackle the cloud cost,” he told Insider, “than it is actually hurting the company by reducing head count.”
Negotiations have gotten ‘ruthless’
Startups that rely on cloud services to run their applications often buy credits at the start of their contract and spend them throughout the length 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 firms have chosen a “pay-as-you-go” plan, where they’re billed for the computing resources they use or the storage amount they’re subscribed to.
But the market downturn has caused more companies to push vendors on prices, Wilhelm said. It’s also accelerating a shift in the cloud industry, where startups hold more sway over cloud giants like Amazon, Microsoft, and Google.
“Companies have gotten accustomed to being ruthless on negotiating contracts,” Wilhelm said.
Doug Schneider, the CEO of 2nd Watch, an IT-services firm that helps companies manage their cloud services, said customers would also threaten to move their data away from Amazon, Microsoft, or Google to one of their competitors to get lower prices.
While startups have relatively low cloud costs in the beginning, those costs increase exponentially as they grow. Airbnb, for example, has a $1.2 billion multiyear contract with Amazon Web Services.
But the bigger the customer, the more leverage it has, Soma Somasegar, a managing director at Madrona Ventures in Seattle, said.
“Startups that have reached a particular level of scale will have higher 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 that works for you as well as for me?” said Somasegar, who led his firm’s investment in Snowflake, a cloud data-warehousing company, in 2017.
The proliferation of upstart vendors like Snowflake, Databricks, and Datadog, which offer their products across multiple cloud providers, has also given customers more sway over the cloud giants. Because those customers use more than one cloud provider for their IT infrastructure — a model commonly called multicloud — they accrue even more negotiating power.
Startups look to optimize, not downsize
Startups have other tools for shaving cloud costs, too.
Many are buying “cloud-cost-optimization” software that helps them select and assign the right cloud resources to an application, which helps them avoid buying more computing resources than they need, said Kyle Harrison, a general partner at Contrary Capital, an early-stage venture firm that also helps manage a community of tech talent.
For example, Zesty, a startup that allows companies to automatically adjust their cloud infrastructure to meet their application’s needs, said its customer 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 Israel service provider, Granulate, for $650 million in March, TechCrunch reported.
Companies are also turning to their own employees to optimize cloud costs.
Experts in “FinOps,” or cloud-finance management, help businesses apply best practices that can reduce their overall cloud spending. The data-analytics firm Sumo Logic, for example, has a dedicated team of engineers and data scientists focused on controlling its Amazon Web Services costs. But the startup Observe, which makes tools to keep watch over all of an app’s components, says that responsibility rests on all engineers, not just FinOps workers.
“The engineering team is ultimately responsible for optimizing that to get where it needs to be,” Ross Lazerowitz, the head of product at Observe, said. “We try to use our product to do it.”
Cut at your own risk
To be sure, the benefits of lowering cloud spending are limited.
Coinbase, whose stock is down nearly 80% in the past six months, slashed its spending on cloud services such as AWS and Datadog in May, according to an internal memo seen by The Information. But the decision didn’t prevent the crypto darling from laying off about 1,100 employees in June amid a crypto sell-off.
Deep cuts to cloud costs can also create catastrophe, investors say.
Many companies depend on the cloud for their products and services to function, especially those that use significant computing resources, such as those in machine learning and data analytics. If they buy too few cloud credits from vendors, they could experience outages or other performance issues when usage spikes, Wilhelm said.
That’s a scenario that the cloud startup Pulumi wants to avoid. The company saw its cloud bill jump from $20,000 to $80,000 in a single quarter because of an increase in customer activity, Duffy, its CEO, said. Instead of panicking or cutting back on cloud computing altogether, it used its own product to tweak how it assigned computing resources.
Ultimately, for some startups, the cloud is simply too important to cheap out on.
“If we were looking to cut costs, that’s not where we would start,” Duffy said.