Cloud Challenge for Enterprise VC’s & Startups

Charles Curran

Senior Director North America

Will IPO-bound enterprise data center startups meet a shrinking market opportunity due to a shift of business workloads to the cloud?

Next-gen enterprise infrastructure startups are growing across storage, compute, networking, security, database, and big data. Innovators like Nutanix and recent IPO Pure Storage are growing rapidly.

Market analysts and stock market watchers widely understand that traditional providers may be losing market share to public cloud vendors such as Amazon’s AWS. But has the market factored in the impact a shift of business activity from “on premise” data centers to “off premise” cloud providers like Amazon could have on the new class of fast growth enterprise infrastructure startups?

In early 2006, Amazon launched Amazon Web Services (AWS). Soon thereafter, startups tuned in to cloud, realizing they could make smaller, incremental spending on storage and compute via AWS. Wall Street woke up around 2012… seeing that incumbent data center infrastructure vendors were losing share. Yet today, 9 years after AWS’s founding, it isn’t widely understood that the shift of enterprise workloads to the cloud may actually be effectively reducing the total addressable enterprise infrastructure market.

To illustrate the example, pretend you are a software developer writing custom applications at a big investment bank. Historically, your application’s “compute” would run on servers, and its “storage” would reside on on-premise appliances. But in 2015, you might “spin up” that application on AWS. In effect, you have just “shrunk” the market for enterprise infrastructure. Not only for incumbent vendors… but for innovators who also sell boxes managed “on -premise” by enterprise IT.

What % of enterprise infrastructure has already moved from “on premise” gear to public cloud? I’m going with a conservative guess of around 5%. Amazon’s AWS” is on a $10B run rate growing at 81% year over and is bigger than its four main competitors combined, according to Synergy Research. By comparison, HP & IBM alone combine for about $200bn of 2014 revenue.

What % of enterprise infrastructure will move to public cloud by 2020? That’s what we’re all trying to figure out. My best guess is around 40%.  In 5 years, 40% of the world’s computing and data storage may reside in 7 of the biggest cloud companies: Google, Amazon, Facebook, Microsoft, Baidu, Alibaba, and Tencent. Note: this includes companies who mostly consume cloud, like Google and Facebook, plus those like Amazon that consume and sell cloud. Also note, the largest clouds are based in USA or China, and telecom carriers are late to the game.

Okay, you say… so the data center infrastructure market is “moving” from big enterprise to big web. So maybe today’s fast growing data center infrastructure startups can power their IPOs by selling gear to the big web companies? Not really.

Why not? Tier-1+ cloud operators largely “roll their own” software for compute, storage and networking, leveraging open source software (like Linux and OpenStack) and commodity hardware. This means Google et al not only don’t have much use for high priced legacy gear, but may also have limited use for startup products.

Why would the big tech companies roll their own infrastructure software? Money, of course. By 2014, Google spent approximately almost $11bn on capital expenditures, mostly on cloud data centers. This compares to $14bn of net income in 2014. Google’s (and its peers’) spending on data center infrastructure would likely be much higher if it paid software margins to the old guard.

Enterprise infrastructure startups are booming in revenue, valuation, and fundraising, especially in cyber-security and data storage. Enterprise storage startups in 2014 raised $1.62bn, up 197% from 2010, per CB Insights. Can this growth continue in a public cloud world? And if not, where should IPO buyers and startup innovators focus their energy?

At Qualcomm Ventures, the investment arm of Qualcomm Incorporated, we are investing in companies that help enterprises on the journey from “on premise” to “public cloud.” We are investing in companies that help big enterprises manage their IT “like a public cloud,” but on premise. And we are investing in infrastructure categories so mission critical, like cyber-security, that they may continue to grow even if the total enterprise data center footprint shrinks.

We believe in “devices, devices everywhere,” including smart phones, drones, robots, and medical devices. We believe this Internet of Things and its explosion of data may create a new category of edge computing, distinct from on-premise or on-device computing and centralized public clouds.

We love our companies and these themes. Enterprise sector wide, the management teams and products are better than ever. The growth is awesome. But, valuations are at record highs, and as we have discussed, cloud is disrupting the market. What constitutes a market top is anyone’s best guess. As we move forward, we hope to encourage feedback on the best way we can all participate in the public cloud revolution and are interested to see what new opportunities may be created by cloud’s impact on the enterprise.

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