Cloud computing and the new breed of start-ups

[This is based on a recent presentation I gave. You can grab the presentations slides here.]

Cloud computing offers well documented benefits to firms, governments and, though indirect and induced effects, to the entire economy. However, for start-ups, cloud computing is not just a welcome boost to the bottom line, it is what can make the difference between spectacular success and oblivion.

There has emerged today a new breed of start-ups that employ cloud based collaboration, cloud based delivery of services and cloud based product development. Their founders embrace the cloud to run a nimble, lightning fast, and borderless company.

How do these firms embrace the cloud? A good example is Recruitment Genius, the London-based start-up that allows employers to fill job openings with rock-bottom prices. The front page of their website boasts filling 40 jobs for the retail chain Tesco, for less than £200. Recruitment Genius manages to stay profitable at these prices, only by having a highly automated (frictionless – according to zdnet) process that covers everything from the initial job post by the employer, to the display in selected job boards, to the collection and filtering of promising CVs, and finally to the delivery of the top leads to the employer. How does Recruitment Genius does it?

There has emerged today a new breed of start-ups that employ cloud based collaboration, cloud based delivery of services and cloud based product development. Their founders embrace the cloud to run a nimble, lightning fast, and borderless company.

The first ingredient in the recipe is cloud based collaboration. Cloud based email, like the ubiquitous Gmail, cloud based collaboration tools, such as the excellent Basecamp, and cloud-based business file storage solutions, such as the highly successful Dropbox (all of which Recruitment Genius employs), all allow start-ups to let people contribute to the company’s success, regardless of where they actually live, and regardless of whether another full-time job prevents them from working with the founders during normal business hours (whatever that means for a start-up). The benefit to the start-up founders of leveraging the help of solid engineers or business developers that they met in grad-school or in their previous job, cannot be overstated.

The second ingredient is cloud based delivery of the service. Recruitment Genious’ technology stack includes Azure for the databases, Amazon for the applicants’ CVs, Jungle Disk for backup storage, and ElasticHosts for the actual applications. They even use Vimeo for customer testimonials videos in their website (which also uses fonts from Fonts.com!). Cloud based delivery allowed the company to take full advantage of its success and grow seamlessly when business began to pick up. For most start-ups, cloud based delivery means retaining the flexibility to shift strategic focus and update their business plan to take advantage of opportunities as they arise. What they say for warfare, that no battle plan survives first contact with the enemy, is also true for start-ups: the game plan will need to change as the founders begin to see things more clearly. The company who has used the cloud to deliver its service and not committed its scarce early resources to a specific technology infrastructure, is the company that will be able to adopt faster to changing circumstances.

Remember when we used to admire companies that got started out of kids parents’ garages? Now kids don’t even need a garage.

Finally, the recipe completes the cloud-based development of Recruitment Genius’ product. The company has all its software code residing in Google Code and hires programmers on demand to keep adding features and functionality. Cloud-based development is crucial for the new breed of start-ups. Services, such as GitHub, Bitbucket, or Google Code, allow companies to break-up development tasks to manageable tasks, have developers branch-off and make their contribution, and merge all the pieces in a functioning whole at the end of every day or week. Developers from oDesk, Elance and a dozen other places, allow start-ups to tap into global programming talent and deliver products fast. Cloud-based development completes the start-ups ability to be borderless. Remember when we used to admire companies that got started out of kids parents’ garages? Now kids don’t even need a garage.

I would prioritize the benefits that cloud computing brings to start-ups, in the following order:

  • Productivity – reducing time to market and allowing management to focus on strategy & marketing, rather than operations
  • Mobility – tapping into global programming talent and allowing people to contribute to the company’s success, regardless of where they live or what they do full time
  • Flexibility – retaining the ability to shift strategic focus and update business plan
  • Scaling – allowing the start-up to grow fast and manage transformation, when opportunity arises

Less important (relatively) but highly relevant even for start-ups that are not entirely web-service-focused are:

  • Financing – attracting seed and angel investors with a low capex business plan and a shorter launch cycle, and keeping a clean and attractive balance sheet with better cash flows
  • Cost – accessing economies of scale in the technology infrastructure that only much larger firms used to enjoy, until recently

To me, a poster child for the new breed of start-ups, is Fantasy Shopper. The start-up has managed to grow lightning fast out of a highly unlikely home base, by embracing cloud technology, more or less as much as Recruitment Genius. The service works like this: you log in with your Facebook credentials, you get a virtual amount of money to spend in putting together a virtual ensemble of clothes and accessories that you can show-off to friends in Facebook. Basically, you show-off your deal-hunting prowess and your good fashion sense. Or you just ask your friends for feedback before buying something you like. Either way, the actual purchase is just a click away and Fantasy Shopper earns a commission from it. Customers («girls aged 20-25» as the Economist puts in a way that is as revealing about the target market, as it is about the authors’ perception of it) get rewarded with vouchers, virtual badges and occasional prizes. Companies pay for the privilege of having their brands be part of the «game». More than 40 retailers have done so already, with more than 200,000 items.

I think the business plan to be as good as a start-up can hope for:

  • Monetization is not an afterthought, but rather built right into the fabric of the business model.
  • It goes after a large and growing market. Today, even though online clothing sales are about 12% of total retail clothing sales (for the US, using Census Bereau data, a back-of-the-envelop calculation gives $243B total retail clothing sales, including mail order, out of which less than $30B is sold online) the ROPO segment (Research Online Purchase Offline) that can potentially captured with vouchers, is perhaps as much as three time higher. (interestingly it appears that clothing ROPO is three times larger than average. McKinsey calculates ROPO to be more or less equal to online in size, for all product cagetories). Roughly speaking, 20% of the retail clothing market is currently up for grabs by companies like Fantasy Shopper that bridge the online-offline gap.
  • It is self advertising: you see your friend’s post in Facebook and within a few seconds you’re using it yourself.

The company has been very successful. It has just secured funding by top tier venture firms and high-profile angels and its members love it: the average member spends 30 min on the site per visit, a truly fantastic level of user engagement.

And yet, Fantasy Shopper is pretty much 4 guys. That reached this point of success only six months after going pre-beta online. From Exeter. With seed money from Hamburg. Seriously. Truly a nimble-fast-borderless start-up.

This is not about growing virtual vegetables. This is good. Socially good.

However, there is another, very important, reason why I think that companies like Fantasy Shopper deserve respect: they are not Zynga. This is not mindless, socially useless growing of virtual cabbage. The data that companies like Fantasy Shopper produce, can potentially reduce global economic waste. Consider for example the way that companies like Gap and H&M produce their clothes far away from their main markets, chasing after low manufacturing costs, with contract manufacturing. Their sourcing, ordering and monitoring are all done through a huge B2B network that spans thousands of kilometers and is mobilized to the fullest to manage thousands of different clothing models per year per company. Naturally, it often takes more than 6 months (rarely below 3) from design to store, and, also naturally, it is very difficult to guess what customers will want in 6 months time. The result is that most clothing items require heavy discounting to actually sell. Bain & Co. has calculated an average 50% markdown ratio. What this means is that half of all of these clothes should never have been produced, had we known what people truly want. Fantasy Shopper, and other companies in different fields, create an opportunity to drastically reduce social waste. Not only do they offer a unique – across brands – view of what consumers value and in what combinations, but they also allow firms to cheaply test on a large scale how people respond to products, before these products are produced. So, indeed, games that people play in Fantasy Shopper give rise to highly socially valuable analytics. This is not about growing virtual vegetables. This is good. Socially good.

And it is always fun being successful, without having to be evil.

Photo by Ernst Vikne (flickr) CC licence

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