Start-ups can replace investors with the cloud, says computer scientist

It’s a rite of passage for tech start-ups to announce their first multi-million dollar rounds of funding, a way to demonstrate viability in a hyper-competitive industry. But taking on funding from outside investors is, to a certain extent, becoming unnecessary and even financially irresponsible because of new opportunities made available by cloud computing, suggests John Seely Brown.

Brown, a former chief scientist at Xerox who now holds roles with the Deloitte Centre for the Edge and the University of Southern California, delivered the opening address at the Burton Group Catalyst conference in San Diego Tuesday.

Brown said he’s puzzled by start-ups that take in large sums of money from angel investors, in the process giving away a large portion of their future value, and then spend that initial cash on an IT infrastructure that will be obsolete in five years. Instead of buying physical servers, start-ups today should simply rent virtual servers from the Amazon Elastic Compute Cloud, he said.

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With the Amazon cloud, “I can now build a start-up at a fraction of the cost I used to build start-ups,” he said.

Brown discussed Animoto, a start-up that built an automated system for creating music videos, and was able to scale up incredibly quickly using the Amazon cloud. Animoto’s application went viral after being posted on Facebook, and because the company ran its infrastructure on Amazon it was able to scale from 50 servers to 5,000 servers in about 24 hours. Without that technology, and cloud management tools made by RightScale, Animoto would have had to pay for thousands of servers up front, and perhaps never use the majority of them.

“The sense of infinite speed to scale up made all the difference in the world,” Brown said. “They didn’t have to pay for the stuff they weren’t using… [Next Page]

Labor productivity has improved remarkably over the past four decades, largely due to improvements in information technology, Brown said. At the same time, U.S. businesses’ return on assets has dropped because of intense global competition, diminishing brand loyalty, and a shift in power from businesses to customers, he said.

Some of the new cloud computing technologies may help restore lost profitability, Brown said, arguing that “cloud is much more disruptive than any of us have ever thought.”

Brown used the example of Skadden, a law firm in New York City, which noticed that a young group of lawyers was resolving cases in “a fraction of the time” needed by older counterparts, simply because they were using Twitter to exchange information when they ran into problems.

The cloud will only become more useful in the future as cloud networks begin to take advantage of powerful graphics processing units, he said.

“Today, on a single chip through Nvidia, we’re getting 512 processors,” Brown said. “I can take a 512-processor box sitting on a cheap Dell server, and I can build this entire thing for $2,000. But why would you want to be satisfied with 512? Why can’t you string 100 of these boxes together? Now I have basically 50,000 processors.”

The Burton Group Catalyst conference will last all week, tackling cloud computing, virtualization, security and many other topics.

Much of the show will focus on what is “the new normal” in IT, as technology pros adjust their role in the wake of a damaging recession. “We’ve made it through the worst of this thing and now is the time we start thinking about where to go next,” Burton Group analyst Chris Howard said… [Next Page]

But while cloud computing seems to offer a less-expensive alternative to many types of business systems, IT has to keep in mind that the cloud carries certain limitations and often increased risk.

“One of the reasons cloud computing seems so appealing to the business side is that it seems to them a silver bullet,” said Burton Group CEO Jamie Lewis. “I can circumvent all these hard problems and integration issues I run into internally. The question is, is that real?”.

For the Burton Group’s part, Lewis pledged that the analyst firm will not be changed significantly by Gartner, the much larger analyst firm that acquired Burton Group earlier this year.

“While Gartner has acquired us we have not been devalued,” Lewis said. “Gartner bought us because what we do is very different from what Gartner has traditionally done.”

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