Our investment in Spotinst
We’re very excited to announce our investment in Spotinst. I was introduced to Spotinst founder and CEO, Amiram Shachar, by Ofer Katz from Nextage earlier this year. I basically decided I wanted to invest after our first meeting, and I’ve spent the past couple months building the case for it.
So why did we invest?
“A no-brainer value proposition” was something we’ve heard repeatedly during this process about Spotinst. A friend who helped me in the process and spoke with a couple of his portfolio companies even described these conversations as the best customer calls he’s had since becoming a VC. The reason for this is simple: Spotinst saves a lot of money for its customers.
Spotinst’s initial offering is a service for managing cloud workloads, with the promise of cutting the cost of the public cloud (AWS and others). Spotinst does this by taking advantage of cloud providers’ complex pricing and product offering, specifically Spot instances (while Spot is an AWS product, I will use it to refer to low-cost products offered by all cloud providers). They run on cloud providers’ excess capacity, and are usually offered at deep discounts of up to 90%. However, Spots are difficult to use and manage, as they come with effectively no SLA (Service Level Agreement) except for a short notice before taking the instance down. Moreover, some cloud providers have developed a dynamic pricing strategy, making cost volatile and unpredictable.
Spotinst seamlessly manages customers’ workloads to take advantage of these lower cost instances, achieving a 50–60% savings while maintaining the performance and availability levels of the more expensive instances. Customer traction and momentum tell an even a stronger story: Spotinst has attracted over 300 customers in less than two years — a growth rate common in consumer or adtech markets. Early adopters mostly included technically advanced, low-margin companies (e.g., adtech companies), but over time there has been increased traction among higher margin businesses like SaaS companies and, recently, even enterprises with large cloud deployments.
“Spotinst also offers a no-brainer business model” was another repeat theme in our customers’ conversations. Spotinst charges a small portion of the savings realized by its customers. This model allows customers to start small without committing to anything in advance, and grow usage over time. Investors don’t typically like this type of pricing model; it’s less predictable than SaaS, and usually difficult to calculate true savings, which leads to tension between the vendor and its customers. However, in Spotinst’s case, calculations are straight-forward. Prices and volumes of alternatives are easily obtained from the cloud providers, so no debate on Spotinst’s impact. Moreover, just like in usage-based models, this model actually leads to better retention numbers than traditional SaaS, since there is no annual renewal process (less churn) and companies usually move more of their applications over time to run with Spotinst as they gain trust or grow (net negative revenues churn).
Trust as a Competitive Advantage — In every investment, we ask ourselves how defensible the model is. Building a highly scalable cloud service like Spotinst’s (managing over 100K server hours per month) with the performance, availability and reliability required by enterprises is not trivial. But it’s also not rocket science. Generally speaking, I believe it’s rare for startups to develop truly unique and differentiated technology. Therefore, IP by itself is not a sustainable competitive advantage, and Spotinst is actually building what we see as a much stronger and more sustainable edge. As customers provide Spotinst with access to their cloud accounts and permissions to manage their workloads, it typically takes them at least 6 months to build the relationship and trust before they shift more critical parts of their applications to run with Spotinst. Once this trust is established, it’s unlikely that customers will switch to another service, as suggested by the zero churn to date. Naturally, Spotinst’s growing customer base helps the company further build a brand and establish relationships with key stakeholders in the market, including Amazon and Microsoft, as well as large integrators and consulting firms, making it harder for newcomers to compete.
Beyond Cost Optimization — Spotinst raised the new round to pursue their vision, which goes well beyond cost optimization. Spotinst’s goal is to make it simple and affordable for companies to run and manage scalable multi-cloud environments, and the plan is to add more products and services that can take advantage of core workload management technology.
As a second product, Spotinst recently introduced a high-performance load balancer. A load balancer is a core element in modern cloud application architecture, effectively connecting all servers, databases and services used. There are quite a few products in the market, but Spotinst’s “Multai” is the first one that can be easily deployed and run in every cloud environment (hence the name), making it simpler to manage multi-cloud applications. In addition, by leveraging Spot technology, it’s also significantly cheaper than alternatives. In the coming year, Spotinst will expand its offering to additional clouds and major use cases, like Serverless and IoT, further moving from a single product to a multi-cloud services platform.
The Elephant in the Room — One VC described the closing party of the last Amazon Reinvent conference as the funeral for many of the valley’s infrastructure startups. With the ongoing strengthening of larger platforms (Google, Facebook, Amazon, Salesforce, etc.), we repeatedly ask ourselves whether this is on X’s roadmap. How would X react? We often pass on opportunities for these reasons.
During this process, we spent much time on these questions, and a couple things made us comfortable with Spotinst’s position. First, Spotinst offers a services layer on top of the cloud, driving adoption and increased usage which serves cloud providers’ interests. Moreover, Amazon and other cloud providers focus more on providing the best infrastructure (e.g., better storage, compute, databases, etc.), and less on making the cloud easier to use or more accessible (e.g., reporting, customer support, etc.). Finally, we are strong believers in the multi-cloud trend. For us, it’s not about moving applications from one cloud to another, but rather about using different clouds for different use cases/applications, and customers will look for services that can help them manage these complex environments.
Consumer-like Growth — In just two years, Spotinst has grown to a team of over 40 employees and more than 300 customers, including companies like TicketMaster, LiveNation, Chegg, and IronSource, with some paying 6 figures per year. Spotinst has optimized to date a total of 800M server running hours and saved a total of almost $100M for its customers. These are staggering numbers, but we believe they’re only the beginning. All this was achieved with only a small seed round, and limited spend on sales and marketing. I can’t wait to see what Amiram and his team will achieve with this fresh capital.