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Innovation Economy

Entrepreneurs look to clouds

Service likely to change how IT industry does business

By Scott Kirsner
Globe Columnist / March 15, 2009
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In these stormy times, just about the only sunny spot in the world of information technology is the coming of cloud computing. Start-ups are being formed, venture capitalists are doling out cash, and big companies such as EMC Corp. and Iron Mountain are formulating strategies and announcing cloud computing offerings.

What's cloud computing? It's a broad and somewhat nebulous term that refers to services and software that run on computers that you don't need to purchase or operate yourself - they're "out there," in the clouds. Essentially, it's a new twist on outsourcing. Cloud computing users pay only for the services they need - much the same way you pay your water bill - which offers the ability to increase or decrease capacity as needed.

If you use Google's Gmail service for e-mail, that's a type of cloud computing. But much of the cloud action happening locally is around enabling businesses to outsource tasks such as archiving e-mails or running analyses of their latest sales numbers, without having to buy the hardware or software themselves.

"Cloud computing will change how we do IT, end-to-end, over the next five years," says Chuck Hollis, vice president of global marketing at EMC, the Hopkinton-based storage firm. "It's like in the early 20th century, if you were a manufacturer, you had to build your own power plant. But eventually, you had the option to buy your electricity from the grid, and let someone else worry about how it was generated. Corporate data centers are going to have that kind of choice, too."

EMC has formed a new business unit called the Cloud Infrastructure Group, run by an executive in Seattle who also oversees Mozy, the company's data back-up service for consumers and small businesses. But the company isn't yet selling cloud services to its meat-and-potatoes corporate customers. Hollis says the company is still in discussions with these larger customers about their needs, and how they'd like to take advantage of cloud-based services.

Last month, Iron Mountain, a publicly traded company based in Boston, unveiled its own cloud service called Virtual File Store. Customers can use it to archive data to which they don't need frequent access, paying a monthly fee rather than buying their own storage devices (which often come from a company such as EMC).

Local venture capital firms are studying the cloud computing opportunity, and they've funded at least two companies so far.

The first was CloudSwitch Inc., a Bedford start-up that was incubated in the offices of Matrix Partners for much of last year. CloudSwitch raised $7.4 million from Matrix and Atlas Venture, another local venture capital firm, in January.

"Cloud computing seems to be fueled by the recession, when you have companies looking carefully at their budgets," says chief executive Ellen Rubin. Instead of buying hardware and software that must be listed as large, one-time capital expenses, Rubin says, paying a monthly fee for cloud services is a smaller, ongoing operating expense.

CloudSwitch is focusing on helping large companies take advantage of cloud services. "We're focused on the connection between the enterprise data center and all these new cloud providers," she says. "By moving things into the cloud, we want to help chief information officers free up space in their data centers, and free up resources, and let companies use that for higher-value purposes." That's the classic argument that has always been made about the benefits of outsourcing.

Another cloud-oriented company with local ties is Good Data, which offers customers the ability to analyze information about their business and create constantly updated reports online.

The company is in the final stages of wrapping up an initial funding round of several million dollars, led by Cambridge-based General Catalyst Partners. Good Data's engineering team is based in Prague and while there was some talk about plunking the US headquarters in Boston, the company just rented space in San Francisco.

"The way I look at it, we're seeing the destruction of the data center," says Larry Bohn, the partner at General Catalyst who is backing Good Data. (That, of course, could mean the loss of some high-paying information technology jobs in data centers.) He adds that he has been seeing lots of companies trying to build businesses that tie into the cloud computing trend - though not all of them have found niches that are defensible enough. Good Data founder Roman Stanek has sold two previous start-ups, to Sun Microsystems and Hewlett-Packard.

"What you do is try to bet early, bet on the right people, and try to get a headstart," says Bohn.

Sonian Networks Inc. is a 10-person start-up in Dedham that is selling unlimited e-mail archiving for $36 per month, per user. The company soon hopes to archive other information, like instant messages, online chats, and collaboration sessions. The company's services run atop cloud infrastructure run by Amazon.com, which has emerged, oddly enough, as one of the leading vendors in the cloud computing market. Sonian has raised $1.2 million of convertible debt so far, and chief executive George Nichols says he expects the company to reach breakeven by this spring or summer.

Another local cloud start-up that hoped to sell storage services, Juneau Technology, never quite took shape despite making the rounds of venture capital firms. Despite having worked for start-ups and larger entities like EMC and Digital Equipment, founder A.J. Beaverson says, "I'm not a branded serial entrepreneur, and in a tough economy, that raises the bar significantly" on attracting investment.

It seems small and midsize businesses will be the first to integrate cloud-based services, while bigger companies will take longer to figure out how these services relate to their existing operations, whether they're secure and reliable enough, and whether they comply with all sorts of regulatory requirements. But the appeal is that cloud-based services can cut the costs of all sorts of IT operations like storage and number-crunching and payment processing, while giving companies the flexibility to simply pay a higher monthly fee as they grow - or pay less when they shrink.

"I think investors' interest in cloud computing is high because of exactly the economic situation we're in," says Rubin. "Where else is there an area where there's a disruptive trend going on that actually benefits from the recession?"

Scott Kirsner can be reached at kirsner@pobox.com.

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