Winter for tech startups is here. VCs are encouraging companies to extend their cash runway as much as possible.
Sequoia Capital also shared in a recent Founders’ All Hands that “Companies who move the quickest have the most runway and are most likely to avoid the death spiral.”
“Investors are underwriting your ability to produce free cash flow durably. To believe that, they need to see durable growth and improving profitability,” adds Sequoia Capital Partner Ravi Gupta in his recent note.
Many have turned to layoffs and hiring freezes. Over the past month, more than 80 tech firms have reported layoffs, according to the layoff tracker site Layoffs.fyi. This includes unicorn and publicly listed companies like Linkaja, Zenius, JD Indonesia, DataRobot, Netflix and Paypal.
Layoffs can damage employee morale and may even prompt high-performing employees to leave. What if we could pull other levers to drive down cost?
One of the key expenses leaders could look at is reducing cloud costs, especially since more than one in three organisations have cloud budget overruns of up to 40 per cent.
Thus, it is no surprise that cloud costs are one of the first things companies such as Coinbase and DoorDash are looking to cut. Technology leaders in Southeast Asia also share the same focus, with optimising cloud infrastructure cost is the top initiative by 75.23 per cent of our leaders here.
What are the challenges faced when controlling cloud costs?
Many businesses struggle to keep cloud costs under control, with 66 per cent of executives saying that cloud usage is “higher than initially planned this year”.
The first reason is due to the lack of visibility.
Also Read: 5 ways startups can effectively leverage cloud agreements to propel growth
In a recent 2022 Cloud Infrastructure report by Spot by NetApp, 70 per cent of technology leaders reported that they could not effectively monitor and optimise cloud costs.
This makes it difficult to control costs and predict sudden spikes. As usage patterns change, so do costs. Without a clear understanding of how usage patterns affect costs, predicting or controlling spending is difficult.
Another issue faced by tech companies is over-provisioning and idle resources. It is challenging for IT leaders to predict the evolving workload, fluctuations, and how new applications consume cloud resources.
Even after developers dedicate time and resources to establish an accurate measurement, test simulation metrics will almost always differ from actual production usage.
Furthermore, DevOps teams would often oversize compute purposely to avoid the application’s infrastructure malfunctioning. This results in startups often over-provisioning when planning for cloud subscriptions.
To put it simply, startups are burning their cash on compute costs that don’t translate into any value for your business.
Thirdly, DevOps experts are a rare breed today, and many startups struggle to get the right talent on board. Several big tech firms have set up regional headquarters in Singapore and scaled up their tech hiring. Smaller tech firms have acutely felt the pinch in talent.
It’s estimated that by 2030, Asia Pacific will be short of the 47 million tech talents needed to meet growing demand. True enough, while 96 per cent of tech leaders say FinOps is important to cloud success, only 10 per cent were able to build a mature FinOps practice, according to Spot by NetApp’s 2022 Cloud Infrastructure Report.
With engineering talent being rare and also expensive, you want them to be building products that add value to the business and help you build a competitive edge instead of spending time managing complex IT infrastructure.
What can startups do to optimise their cloud costs?
The first step is to get visibility into your current consumption. It becomes difficult to make cost-related decisions when you can’t accurately view billing data or cloud spend data over time.
For a start, you need a proper dashboard. Tools that can automatically discover and map your infrastructure can help you get that full picture, not only showing information about instance counts and summary costs across all of your cloud accounts but also providing the ability to look at that information organised by tags, pods, clusters, services, and applications.
India’s leading BNPL startup, ZestMoney, reduced its EC2 spend by around 60-70 per cent with the help of Spot by NetApp.
Also Read: How cloud computing is helping startups navigate the new normal
Their first step was to dig into their cloud spend and get actionable insights with Spot by NetApp. They were able to automate the right-sizing of instances for cluster efficiency enabling significant cost savings.
“DevOps was being asked why infrastructure utilisation was at around 50 per cent for 100 per cent of the actual cloud spend. Cloud Analyzer allowed us to easily see our spending alongside clear, actionable insights to increase efficiency in our infrastructure and cut costs,” explained Ganesh Narasimhadevara, Director of DevSecOps and Platform Engineering.
With visibility, companies can then start to focus on optimisation. One of the common methods is to commit to reserved instances or Savings Plans for one year or three years in exchange for savings of as much as 75 per cent.
However, doing this manually often comes with many challenges.
Firstly, predicting and forecasting consumption is often difficult and not accurate. “The thing about cost reduction is you have to figure out how many resources you want to buy in advance, right?
“You have the concept of reserve instances, which made it very difficult. In our business, we go up and down, we scale up during sales periods, and our traffic is very unpredictable,” explains Ninjavan’s CTO Shaun Chong in a recent interview.
Another key challenge is the sheer amount of engineers’ effort and time to optimise cost. This tedious process requires them to identify the exact amount of CPU and memory needed for every container, pod, and deployment. Manual methods are also inefficient and error-prone, leading to troubleshooting that, in turn, affects application availability.
In a recent Forecasting & Scenario Planning Session for Sequoia portfolio companies’ founders, partners encouraged Founders to “build muscle” by doubling down on product innovation.
“The reason is, long term, the best product tends to win, and that is more true in an environment of scarcity than in an environment of abundance,” they explain.
With that in mind, you want your engineering team to focus on innovation that helps you build a competitive edge instead of spending time on tedious tasks.
Given these challenges, many technology leaders see the value of automating cloud optimisation. It is quickly becoming the tech industry’s new norm.
An automated cloud cost optimisation solution brings significant cost savings as it can fix many issues that contribute to high cloud costs. It instantly reacts to changes in applications’ demand and adjusts the resources to avoid cloud waste and over-provisioning.
At Spot by NetApp, we’ve helped many startups in Asia, including ZestMoney, Trax, PayMaya, and Practo, lower their cloud compute costs by 60-90 per cent.
One of them was Series A startup, SignalVine, which increased its EC2 savings by over 283 per cent. On top of that, they could eliminate internal efforts required to manage their Reserved Instances, freeing up valuable resources to help grow their business.
Why now?
No one knows how long this downturn will last, but the common consensus is to extend your cash runway.
Also Read: How companies can nurture the next generation of tech talent today
“I have no idea if now will be the same, better, or worse than the 2000s crash. But bad times can last multiple years, and if you can make decisions now that extend your runway, that’s probably the right call,” shared VC and former Meta CTO Mike Schroepfer in a recent tweet.
Given these realities, startups want to avoid being asset-heavy, low-margin, and high burn. A key lever to pull which would make a huge impact on your balance sheet is to reduce cloud waste and optimise cloud cost.
When we act fast and plan well during downtimes, it can even help us acquire market share. As shared in Y Combinator’s letter, “Remember that many of your competitors will not plan well, maintain high burn, and only figure out they are screwed when they try to raise their next round. You can often pick up significant market share in an economic downturn by staying alive.”
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