Zero-capital startups

The emergence of the cloud has greatly impacted entrepreneurs (and their investors) eager to start a new business. It has lowered the barrier of entry for innovation and has leveled the playing field for new entrants who can now bring new software services to market with little up-front investment. By unleashing large amounts of computing capacity, it has enabled new classes of applications that previously only companies with deep pockets could afford.

3.4.1 Then and now: setting up shop as startup ca. 2000 vs. startup ca. 2010

Entrepreneurs today face a different set of challenges than they did a decade ago, par- ticularly those trying to set up a software service or online business. The main differ- ence is how far a startup can get today without obtaining a large amount of capital to fund their business compared to how far they could get in the past. Formerly, without an external source of funding, a couple of founders might be able to dream up a new application or service and start prototyping it on their desktop computers and then load it up on a laptop to take in to demo to some angels or venture capitalists . If they had a little more capital resource available, they might be able to purchase a handful of servers, sign an annual contract for some colocation space, and then hope for the best. If they either ran into a tough patch or had extreme success, they were severely constrained: they had to look to external resources for capital to either keep the busi- ness afloat or keep up with growing demand.

Today, the picture is entirely different. Entrepreneurs don’t have to stop at a prototype or a demo application because they lack the capital necessary to launch the offering. They can much more easily bootstrap the operation because the availability of cloud services means there are no up-front costs such as hardware to buy or data- center space to rent. They can have fully functional and operational businesses

online generating value. If the business idea isn’t that great after all, nothing is lost except the sweat equity that went into putting the idea into practice. If, on the other hand, the business takes off, the on-demand nature of provisioning cloud services means that more instances can be brought online as needed so that costs only ramp as usage (and, we hope, revenue) ramps. As a small organization, the startup has the advantage of being nimble and able to react quickly to changing needs of the market. Because of the availability of the cloud, some of the advantages a larger company may have, because of its better access to capital, are reduced.

But the leveling of the playing field cuts both ways. The barrier to starting and operating a business has not only been lowered for one, it has been lowered for all. Many small competitors can enter a space; and without sustainable differentiation, such as superior technology, better distribution, or service, the only means of competing ultimately is price. For example, let’s explore the concept of load testing using the cloud by looking at the open-source project Pylot . In a matter of minutes, you can launch an instance, point it at a website, and run a load test. It isn’t a particularly big stretch from that exercise to putting together a service for load-testing in the cloud by writing some software for coordinating several instances and collecting and summarizing the results. Several startups are trying to make a go of this, some with little or no external funding and others with traditional venture backing. These startups face the challenge of differentiating themselves with almost no intrinsic defensibility in their offering. They must rely on better technology, service, or distribution to come out on top.

3.4.2 Is venture capital funding a necessity?

With the barrier to starting a software service or online business so greatly reduced, you may ask whether all this leveling of the playing field has obviated the need for en- trepreneurs to get funding from venture capitalists. As discussed previously, the main change brought about by the cloud is the ability to get farther along before requir- ing large amounts of capital. The cloud may obviate the need for some companies to achieve scale without taking on external capital. But you must remember that the capital cost of running an application infrastructure is only one of many aspects re- quired to scale a business. To cite one example, the availability of cloud services hasn’t reduced the costs of hiring people to market and sell products and services. In many cases, in order to scale a business, you still need external funding.

The availability of cloud services as a possible deployment model allows an entrepreneur to go farther in developing a business than was possible before. From the venture capitalists’ perspective, this has the desirable effect that they can evaluate a fully formed and realized idea that should theoretically reduce the risk for the investor. After the idea has been executed and the business model demonstrated, it becomes less of a risk. You may guess that such a reduction in risk means better terms and higher valuations for prospective entrepreneurs looking for backing; but alas, this generally isn’t the case. Other entrepreneurs are maturing their businesses in the same environment, meaning the bar is raised for all uniformly to obtain financial backing as the market for available capital adjusts to the changing quality of deals.

In the next two sections, we’ll look at a couple of startups that are using the cloud in new ventures. We’ve selected them for discussion from the finalists in the Amazon AWS Start-Up Challenge as thematic representations of the kinds of new businesses being launched using the cloud. The first is a business that uses the large on-demand compute capacity to enable a business that previously wasn’t possible for a new market entrant because of the capital outlay that formerly would have been necessary. The second is a service utilizing the on-demand flexibility of the cloud to build a SaaS application for a specific targeted niche.

Amazon AWS Start-Up Challenge

The Amazon AWS Start-Up challenge is an annual competition that has been held since 2007 by Amazon to promote innovation on the company’s cloud. Entry to the competition is open between July and September, with several finalists chosen in November. The final round is held in December, with each finalist presenting to a judging panel that includes representatives from venture capital firms. The winner of the contest gets $50,000 in cash and $50,000 worth of credit for Amazon AWS cloud services.

3.4.3 Example 1: FlightCaster—airline flight-delay prediction

FlightCaster was one of seven finalists in the AWS Start-Up Challenge in 2009. Flight- Caster is a startup whose service targets business travelers. The FlightCaster service predicts whether a flight will be delayed by comparing real-time conditions with his- torical data.

Users of the service enter flight numbers for upcoming flights using the FlightCaster Blackberry or iPhone application on their smartphone. It uses a patent-pending algorithm and processes large volumes of data consisting of information about the weather and statistics on the departure and arrival times of all flights over that time frame. FlightCaster updates the probability for delay continuously for the flight selected and assesses the likelihood that the flight will be on time or will be delayed for an hour or more, by matching current conditions to situations in the past. Advance warning allows travelers to anticipate and plan around delays by reserving alternative itineraries before delays are officially announced. This gives travelers the potential for more available options.

Without the cloud as a deployment option, this business would be difficult to start up, because it would need a large amount of capital to store the data for analysis and to make the calculations to provide the service.

3.4.4 Example 2: business intelligence SaaS

The Grand Prize winner of the 2009 AWS Start-Up Challenge was GoodData , which is a business intelligence (BI) SaaS provider. GoodData is an easy-to-use service for

businesses that need BI to help understand data about their business, so they can make better decisions.

The deployment of a traditional BI solution in an enterprise can run in the millions of dollars for software and hardware and can take several months to implement. Several business services (CRM, payroll, and travel and expense [T&E] management) have been offered in a SaaS model. But BI as SaaS is a relatively new concept, perhaps because, before the cloud, it wasn’t economically feasible. BI as SaaS requires more storage and processing than other, more traditional, SaaS businesses.

Using the cloud to run its BI service allows GoodData to support large-scale compute and data-intensive analytics without the need to scale up its own internal infrastructure. Elasticity allows GoodData to use resources only when customers need them to support their BI needs. GoodData can in turn pass these savings on to its customers by offering a relatively inexpensive alternative. As a SaaS solution, potential customers can evaluate GoodData for free immediately after signing up for the service, via a web interface. The service can be purchased in an on-demand model for $500/month.