Cloud storage provider Nirvanix (News - Alert) recently closed up shop, forcing partners and clients to scramble. In fact, customers had just weeks to move their data to another provider.
What happened? They ran out of cash. Cloud services providers like Nirvanix need cash because with one customer or a hundred -- the data center, the leases and payroll expenses all have to be met.
In the startup community in Tampa Bay, many say the biggest hurdle is investment capital. Actually, the big hurdle is cash. It seems more than a few think the only way to get cash is from an investor. Even if you get investment capital, you still have to sell to prove your business model and to provide cash flow. Not everyone is an instant Twilio, Facebook or Twitter (News - Alert) success story.
It has been said that setting price is a challenge for businesses. When there are a number of providers in your space, like in hosted VoIP or cloud storage, it would appear that the market has already set the price for you. What do you do if the market set price is not very profitable for your business?
Worse, what do you do if you if you don’t know what it costs to run your business, such as the cost of sales and goods and the cost of customer acquisition? What if your churn is so high that even a profitable price can’t make up for the turnover, since most customers aren’t profitable for at least six months and often many times longer? These factors can wreak havoc on your cash flow and your financial planning.
Cloud services have a lot of CAPEX spending in the beginning on hardware, data centers, bandwidth and gear. Ongoing costs for power, ping and pipe must all be paid -- but security isn’t a one and done checkbox either. You’ve got to pay for this as well.
Meanwhile software development, APIs, and integration are professional services, and these expenses are not always factored into price or install costs.
Certainly Cash is King. Cloud providers need cash for start-up, development, and to get the sales machine going. After that, price plays a significant part in not only sales, but in cash flow.
I think we will see more cloud services providers go broke. There are too many of them; not enough good marketing; not enough cash flow; and too many big players like Amazon eating at their lunch.
Peter Radizeski is a telecom consultant and the owner of RAD-INFO (News - Alert), Inc.
Edited by Stefania Viscusi