What are the next hot topics as an investor? This multi billion dollar question is on everybody’s lips. Our crystal ball at Elaia is no more accurate than others. But our analysis has highlighted 5 sectors which we believe will keep growing — even thrive, during and after the crisis. Cloud Infrastructure, RetailTech, Digital Transformation of the Corporation, FinTech and Digital Life Science are compelling investment opportunities due to their transformative potential for businesses and consumers.
To start off this series, we dive deep here into Cloud Infrastructure, the backbone upon which the digitalization of the world relies. Let’s assess what is at stake and how its profound undergoing evolution, although complex, represents a fantastic investment opportunity.
Cloud-based services are devouring the world…
Stripe, Snowflake, and Zoom went from valuations of $0 to respectively $35 billion, $70 billion and $135 billion in under 10 years. We won’t debate whether the valuations of these cloud-based services are reasonable. But they reflect the perceived technical and financial power of the Cloud in today’s and tomorrow’s economy — and the pace at which it is ineluctably conquering the world. This trend applies broadly to Cloud-based companies. According to Philippe Botteri of Accel: “With around $1 trillion of value created in the past 12 months and the Cloud Index massively outperforming the Nasdaq”
Amazon Web Services went from $0 to over $40 billion of annual revenues in 14 years. Alibaba Cloud is growing at a steady 70% annual rate (not bad for a multi-billion dollar, 10 year-old service).
And now, 95% of companies worldwide rely on cloud computing, attracted by such benefits as outsourced management, scalability, resilience.
Just as important, by lowering the complexity of managing IT resources, the cloud has reduced the barriers to developing and launching new services: the cloud has become the digital economy’s innovation playground where thousands of startups blossom.
Finally, the digitalization of the world will even accelerate during the current sanitary crisis, adding to the success of Cloud-based services : “We saw 2 years of digital transformation in 2 months.” Satya Nadella
… but that puts A LOT of pressure on the Cloud Infrastructure
However, the immense success of cloud computing and cloud-based services is putting tremendous pressure on the underlying infrastructure, which faces huge challenges in meeting growing demand.
We need to constantly reassess and push the limits of Cloud Infrastructure in terms of overall performance (scalability, data rate, latency and availability), ease of use and manageability, security, and, obviously, energy and cost efficiency.
From the bottom of the hardware stack (CPU, GPU, FPGA, storage) to the upper layer of the management software (multi- and hybrid- cloud management);
- through its overall topology — from hyperscale, centralized to micro edge data centers;
- through the networking, virtualization, automation and orchestration components;
- through all DevSecOps tools and practices within the organizations;
every single element that contributes to the immense and intricate puzzle of Cloud Infrastructure is impacted and must dramatically evolve.
As a result, innovation has been sparkling and investments are thriving. Allied Market Research estimates the market for the cloud infrastructure is projected to grow 16% annually, reaching $1 trillion by 2027.
This includes massive investments by the biggest names in tech, but it has also led to an explosion of startups who have raised $1.2 billion in venture capital the first 8 months of 2020, according to Crunchbase.
Collectively, the Cloud Infrastructure startups are focused on building an internet that is more robust, secure, efficient, flexible, and easier to manage. Out of this fiercely competitive innovative sector will come the disruptors and the leaders of the Cloud Native era.
While these founders have their own particular visions, they recognize that just being online and in the cloud will not be enough for companies to remain competitive. As cloud providers radially overhaul their infrastructure, every other company that relies on them will have to follow as their IT becomes even more distributed and connected. The resulting wave of capital expenditure represents a massive opportunity in the coming years for cloud infrastructure investment.
“Cloud Infrastructure is a tech-intensive domain, prone to innovation, fueled by the pervasive adoption of cloud-based services and their massive economic stake: This is a sector that deserves a specific attention from tech-loving VC” said Elaia partner Marc Rougier.
Elaia focuses on “deep tech” and “tech-intensive” startups. The firm seeks out companies that are founded on advanced research and science or require serious domain and technical expertise that provides a strong and defensible competitive advantage.
Let’s now dive deeper in the Cloud Infrastructure investment opportunity:
- what are the five top areas we should be focusing on
- what business forces drive this momentum, what are the economics at stake
- and how we, at Elaia, are involved in such an exciting space.
The key architecture that creates the foundation for transformational technologies
Born 15-odd years ago, the Cloud — cloud computing, cloud-based services, cloud infrastructure, has become an a ubiquitous term that encompasses the modern way to connect, process and store data and services over the Internet on a global scale.
If the technical challenge is unwieldy, so is defining what one exactly means by Cloud Infrastructure. The precise definition can vary depending on a company’s and client’s perspective, as it congregates many technologies, models and agents. Amongst them, a few fundamental areas are crucial to laying a new foundation. Let’s discuss here five subjects we believe are worth every CIO, investor & tech founder’s attention in today’s Cloud Infrastructure evolution.
Note: For the sake of simplicity these 5 subjects are presented separately here; but of course, in real life they are intimately intertwined.
1. Edge Computing:
The Cloud is built on an ever evolving architecture; no longer contained, it’s conquering all resources at the edge, with workloads being distributed in a fast growing number of endpoints.
Rather than sending data to distant, centralized cloud facilities, the Edge Computing paradigm consists in sending the computing capacity where the data is produced or consumed: “at the edge of the Cloud”. 5G networks will massively increase the amount of data being transferred, making Edge Computing critical to avoid latency. Applications such as autonomous vehicles, drones, robotic surgeries, and smart cities can’t tolerate high latency. Such delays are also a pain point for any application where user experience is critical, from media streaming to e-commerce.This will fuel the expansion of both Edge IoT, with intelligent objects that can process the data where it’s collected, and Edge Cloud, with new decentralized data centers. As of this summer, there were 541 hyperscale data centers in the world, according to Synergy Research. At the other end of the spectrum, the maturation of Edge Computing is pushing the need for “micro data centers”, or “Points of Presence”, that are now being deployed by the thousands.
By 2022, 90% of industrial enterprises are projected to use some kind of edge computing to enable their Internet of Things, according to research firm Frost & Sullivan. Likewise, spending on edge computing is expected to grow annually by at least 37% from 2020 to 2027, according to Grand View Research. This mix of data centers and connectivity poses new challenges in terms of manageability and security.
2. Cloud Native computing:
Migrating to the cloud is not enough. To really draw the benefits of the cloud’s promise — scalability, fault-tolerance, agility - businesses must embrace modern IT practices: virtualization, microservices and automatization.
As companies moved their services online, they have written long, monolithic pieces of code that can be inflexible and cumbersome to maintain. Cloud Native computing essentially breaks applications into smaller, self-contained units (microservices) that lower development costs while making it easier to deploy, run and scale features dynamically across different platforms. This movement was catalyzed by companies such as Docker, which democratized containers, and has become a phenomenon thanks to the open sourcing by Google of its Kubernetes orchestration platform that manages containers. Kubernetes is governed by the Cloud Native Computing Foundation, which has seen its membership grow 4 times, up to 560 organizations since 2017. More recently, GraphQL and serverless are very promising to enable the next-generation of API.
Beyond its technological components, Cloud Native is first and foremost a new way to approach the development, deployment and operations of Cloud-based services, as crystallized by the DevOps concept and its growing importance in the IT organization.
3. Managing Complexity:
The cloud was initially created under a double promise: CIOs would outsource the complexity of managing their IT and would benefit from better scalability and resilience. While scalability and resilience are delivered, the humongous sophistication of multi — and hybrid - cloud topology and zillion of associated tools and services create a new complexity, that now needs to be managed.
In the early days (in 2000s), AWS was providing 3 simple cloud services, now we have 5–10 major Cloud Providers each providing 100s of different services !
Andy Jassy, AWS founder and vice president in 2006, said at the time that Amazon S3, “helps free developers from worrying about where they are going to store data, whether it will be safe and secure, if it will be available when they need it, the costs associated with server maintenance, or whether they have enough storage available. Amazon S3 enables developers to focus on innovating with data, rather than figuring out how to store it” : the promise was, indeed, simplicity.
While the benefits of microservices architecture have been established, deploying and maintaining a Kubernetes cluster can prove more painful and costly than expected. Mapping dynamic workloads and data in an ever-changing architecture can be quite challenging. In such a distributed, multi-tenant architecture, observability is key. In the face of these challenges, new tools, new practices, new abstraction and new automation paradigms are needed: software-defined networking is one of the most exciting developments here, but SDWan, API gateways, dynamic routing, mesh networks, stream-processing, observability tools and multi-cloud management software are also poised to play an important role.
The velocity of such innovations are forcing DevOps to continuously maintain and improve their skill sets at an unprecedented pace. In order to draw the benefits of the Cloud in terms of scalability, agility, quality of service and cost of operation, businesses’ IT need to stay up-to-date with a vast and fast growing collection of tools and practices: making those simpler, abstracting the complexity while increasing the sense of control, is yet another great investment opportunity.
4. Cloud Data:
We all know it: data is the new ‘oil’; however, with the exponential growth of the data sphere, the Cloud needs updated data storage and data refining capacity in order to exploit its potential.
Data is increasingly stored remotely in “pools” where it can be more rapidly processed and analyzed, a critical step particularly for making many algorithms more powerful and effective. This is essential as the amount of data online, driven in part by machine-to-machine communication and IoT, is projected to grow from 33 zettabytes in 2018 to 175 zettabytes in 2025, according to IDC or 50 fold in 10 years according to Statista. As such, the Software-Defined Storage market will rise 36.7% annually from $12.05 billion in 2019 to $22 billion in 2021, according to a Markets and Markets research report. Real-time data represented 15% of the total data created and captured in 2017, and is projected to be nearly 30% by 2025, according to Seagate. That trend will be propelled by the 150 billion connected devices that will be in service by 2025 which will lead every connected person in the world on average to have a digital data engagement over 4,900 times per day by 2025, yes that’s one every 17.5 seconds!
This tracks an evolution in the nature of data storage, from being primarily an archive to being shared at human speed and now being accelerated by machine-to-machine processing and IoT, fueling data lakes for Big Data and Artificial Intelligence use cases, putting pressure on ETL, data normalization, data integration, data encryption; and, beyond all technical aspects, on political and organizational issues such as data governance and data sovereignty. Challenges — and therefore investment opportunities — will keep arising in the Cloud data space as long as the data sphere will keep growing.
With the Cloud comes a new, larger attack surface, with its very own vulnerabilities, invisible to traditional approaches. Understandably, businesses are sometimes hesitant to migrate mission-critical services to the Cloud. Hence the need for dedicated Cybersecurity tools & practices to establish a trustful relationship between businesses and the Cloud.
More devices and users exist outside an enterprise, upending traditional security strategies. Throw in the growing availability of AI to power attacks, and the weaknesses seem to multiply. That’s why adopting a security mindset right from the start is essential and embracing new security philosophies such as zero-trust and leveraging AI to defend systems are gaining widespread adoption. CrowdStrike Services reported that the amount of time between when an attack occurs and when it is discovered — the ”dwell time” — increased by 10 days to 95 in 2019, up from 85 in 2018 as adversaries become more adept at using countermeasures to hide their intrusion. Allied Market Research valued the cyber security market at $104.60 billion in 2017 projects that it will reach $258.99 billion by 2025. Next generation cloud infrastructure must have security deeply integrated to manage identity and to automate monitoring of API access via gateways.
From protecting personal data to securing mission-critical services, cybersecurity is a prerequisite to the sustainability of the Cloud. As the multiplicity and criticality of threats grow, so do the investment opportunities.
While these categories have their own distinct products and companies, they are also deeply intertwined with each other. For instance, Edge Computing calls for new forms of security, such as Secure Access Service Edge; security features are built directly into software and systems as they are developed; Cloud Native practices lead to a greater distribution of assets that calls for better and more dynamic connectivity. That in turn is creating a host of new jobs based on skill sets for people who can think across the boundaries of these categories. And as many investment opportunities.
An accelerated movement towards the cloud
If this sounds like a frenzy of activity, well, that’s because it is. The move toward the cloud is accelerating. Not only are startups building their services with a cloud-first mentality, but incumbent giants are now making the shift. This upheaval in cloud infrastructure had led to some extraordinary developments that serve to underline just how much energy and resources being poured into this sector.
The cloud has been propelled by the rise of Amazon Web Services, Google Cloud, Microsoft Azure, Alibaba Cloud, IBM (which recently announced a spin-off to create the #1 MSP on hybrid cloud, a $1Tr opportunity), OVH Cloud in Europe (the private hosted cloud specialist, who joined forces with T-System to built a trusted cloud offering in Europe), and other Infrastructure as a Service companies. In just 2019, companies spent $107 billion on cloud computing infrastructure, up 37% from 2018, according to Canalys. The good news is that the cloud has made it extraordinarily easy to deploy a SaaS model, to launch APIs, and to scale quickly. This momentum has been helped along by low-code tools that simplify the development of applications and make the process more accessible to a wider range of people.
This has become a massive business for these companies who are investing billions in expanding and advancing their platforms. And the scope of this arm race has become even clearer in September with the announcement of the $40 billion acquisition of Arm by NVIDIA, which the companies have described as a deal to drive the future of AI and the cloud. “Uniting NVIDIA’s AI computing capabilities with the vast ecosystem of Arm’s CPU, we can advance computing from the cloud, smartphones, PCs, self-driving cars and robotics, to edge IoT” Nvidia CEO Jensen Huang said at a press conference.
As another clear milestone of the cloud adoption, France’s leading bank BNP Paribas signed a deal reportedly worth $2 billion with IBM to move some of its financial services to the cloud. It was a landmark decision for a company that has always been, quite understandably, extremely cautious about data security.
And in mid-September, Accenture announced a $3 billion investment into its new Accenture Cloud First with a goal of helping “clients across all industries rapidly become ‘cloud first’ businesses and accelerate their digital transformation to realize greater value at speed and scale.”
At the other end, this revolution is spawning new companies such as HashiCorp. Founded in 2012, the company is focused on helping enterprises manage complexity through their tools and services. With Terraform, for example, HashiCorp simplifies the task of creating infrastructure that can blend multiple cloud services, private clouds, and a company’s legacy IT. In March, the company raised a Series E round of $175 million at a valuation of $5.1 billion.
Meanwhile, incumbent cloud players such as VMware are rushing to embrace Cloud Native development. VMware was considered a pioneer of cloud computing thanks to its virtual machines. As a new wave of cloud computing came along, there was a perception that VMware could have had fallen behind. But more recently, the company has vaulted back into the Cloud Native game, in part with the help of acquisitions. In 2018, the company paid $550 million to acquire Heptio which had been founded by two of the creators of Kubernetes. Cognizant of the Cloud stake, VMware keeps developing its Cloud offering through a very dynamic, multi-billion acquisition strategy including Pivotal, Bitnami, Kubernetes security startup Octarine and most recently Saltstack in the SecOps space.
A dynamic acquisitive & IPO space
VMware’s deals represent just a fragment of the acquisition wave building around cloud infrastructure in recent years. This includes deals such as:
Even more staggering, earlier this year Alibaba announced it will invest more than $28 billion over three years in its cloud infrastructure. The decision came after the Chinese company saw use of its workplace chat app and live streaming service explode during the pandemic. “By increasing our investment on cloud infrastructure and fundamental technologies, we hope to continue providing world-class, trusted computing resources to help businesses speed up the recovery process and offer cloud-based intelligent solutions to support their digital transformation in the post-pandemic world,” Jeff Zhang, president of Alibaba Cloud Intelligence and chief technology officer of Alibaba Group, said in a statement.
These transactions are a testimony of the enormous economic stake of Cloud Infrastructure — very few sectors enjoy such a momentum. As it is fueled by a world wide trend and served by fast moving innovations, it’s indeed a fascinating space fo tech-savvy investors.
Elaia and Cloud Infrastructure
Cloud Infrastructure is huge and is tech-intensive: it has been an obsession and a passion for Elaia for the past decade.
We look for founders with strong visions and back them early in their journey to help guide them at their most formative moments. Through our funds we have invested across a range of cloud infrastructure companies that we believe have powerful, transformational potential.
One such company was Acorus Networks. Founded in 2014 by Benjamin Schilz and Raphael Maunier, Acorus developed technology to thwart DDoS attacks. Such attacks have exploded in recent years, and the co-founders created a cloud-based solution that allows enterprises to identify legitimate and illegitimate traffic to fight back. In 2018, Elaia led the company’s $6 million Series A round. The following year, Acorus merged with Volterra (now a Gartner’s Cool Vendor & IDC Innovator), which subsequently raised a $50 million round by such investors as Mayfield, Khosla Ventures, Microsoft and Samsung to deploy its world wide platform for distributed cloud services.
Elaia invested in OpenIO $5 million Series A round in 2017. OpenIO develops an hybrid, multicloud high-performance object storage open source solution. The makers of software-defined storage saw rapid adoption by businesses that needed to optimize their data access and manage the complexity of their workloads, especially in the fast growing big data space. This past July, OVHcloud acquired OpenIO with the ambition to create the best Object Storage offer in the market.
Still data-related, but higher in the stack, Elaia has also invested in ForePaaS, the end-to-end data platform that helps build, deploy and operate AI applications at scale, on hybrid- and multi-cloud configurations. Owing to its modern, automated and Cloud Native architecture, ForePaaS has been selected by Gartner as a Cool Vendor in core AI Technologies.
Cryptosense highlights another Elaia value. The company is a deep tech spinoff from INRIA, France’s National Institute for Research in Digital Science and Technology. Created in 2013, Cryptosense’s technology is based on leading-edge research at INRIA that is used to detect and fix cryptography-related vulnerabilities in applications and IT infrastructures, critical when migrating to the Cloud. Its main clients are banks, governmental agencies, and software editors who need strong security assurances if they are going to continue moving their businesses to the cloud.
On the data security & privacy side, Elaia invested at a very early stage in Cosmian. Cosmian’s software solutions leverage deep tech, advanced cryptography to allow multiple business entities to collaboratively process sensitive data — without ever accessing each other’s underlying data in clear text. Cosmian unblocks data-driven projects where multi-party collaboration is essential with respect of data security & privacy — such as in financial services, health, cybersecurity…When it comes to Cloud Computing, Cosmian’s solutions help companies to secure migrating sensitive data and workloads to the cloud.
As mentioned above, different areas of the cloud infrastructure are often intertwined into other composite areas. This is the case of DevSecOps (Development, Security and Operations), a new area where typically the Cloud Native practices and the Cybersecurity challenges meet. Elaia led the Series A in VChain, the immutability company, also the founding member of the Zero-Trust Consortium. VChain develops CodeNotary, a DevSecOps product that allows seamless and immutable recording of all business data and transactions with cryptographic verification, a key security requirement in an ever changing dynamic architecture, especially for critical businesses such as Banking, Pharmaceutical or Government.
While these companies have very different technologies, the founders shared a vision founded on the need for a new internet.
That includes Emile Vauge. While working on a Cloud-Native Networking project, he needed a reverse proxy to fetch data from a server. This was a pretty standard developer tool, but it didn’t yet exist in the microservices world. So he decided to create one as a side project, and eventually released it as an open-source project called Traefik.
To his shock, Traefik took off, riding a wave of interest in microservices. Vauge founded a company called Containous, now known as Traefik Labs. With more than 30,000 stars on Github and over 2 billion pulls on Docker, Traefik has become one of the most popular open source projects in the world. Vauge says tools like Traefik are an important step toward simplifying the management of online applications, a critical challenge as more and more data moves to the cloud.
“Every company needs to adapt. Every company needs to revamp its own infrastructure. Everything is going online; how are we going to manage that?” Vauge said. “20 years ago, we were able to manage everything manually in small companies with 10 servers. But now that companies have hundreds or thousands of applications to manage, it’s not possible to do it manually. It has to be automated.”
In 2017, Elaia led the seed round into Vauge new company at the very beginning of its journey, recognizing its potential as a dynamic open source cloud infrastructure. Three years later, Elaia participated in a $10 million Series A round for the company, which is now developing — leveraging Traefik exceptional adoption -, a comprehensive solution for Enterprise networking in the Cloud Native era.
Rougier said that this company is emblematic of the massive opportunity Elaia addresses and that continues to grow: Businesses that are building complex technologies, often out of Europe, and that can rapidly tackle a global market.
“Those kinds of opportunities remain financially accessible to investors, as long as you can identify and understand them early,” Rougier said. “It’s a huge, complex and fast moving field; but it’s one we love and know well: we’ll keep investing actively in the future of the cloud”.
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