Financing Your Way to the Cloud | Gaining Altitude in the Cloud

Posted On October 14, 2011

Just as the dot-com era required an overhaul of financial and funding models, today’s clouding computing revolution is also challenging the status quo of traditional financing. Indeed, with so many uncertainties about the cloud looming in the minds of potential buyers, coupled with challenges in obtaining credit, the technology vendors in all cloud computing areas (IaaS, PaaS, and SaaS) are quickly realizing that to facilitate the transition to the cloud they need to step up to the plate and streamline and overhaul their financial arms. And this means establishment of capital entities, e.g., Cisco Capital, HP Financial Services, etc.

Ultimately, we’ll see levels of standardization among cloud-focused funding models. But until then, technology providers are developing and offering customized financing structures for key customers to enable them to meet their Capex budget requirements. The offerings include on pay-as-you-grow or pay-as-you-go bases for server/hour and RAM/hour computing.

The upside of these new financing models is initially for buyers, as they make it more palatable for CIOs, who would otherwise be thinking and sitting on the fence, to transition faster to the cloud. In the short term, however, they are having an adverse affect on cloud technology vendors’ financial statements, as they cannot immediately recognize the revenue for hardware and software sales. And this will make it appear that margins and revenues are distressed. But as the financial analysts at investment banks gain greater understanding of the nature of the cloud computing business, they will gradually rewrite the rules on how they financially evaluate cloud computing providers.

But we all need to hope that the financial analysis done for the cloud computing business is done right. Remember Kozmo.com? It was a company with a doomed business plan, but it was still able to attract millions of dollars in capital. We don’t want to go back to a time where capital is committed based on the promise of the business but which makes little financial sense.

In our next blog, we will talk about the operational and financial challenges technology vendors face in rolling out these new business models.

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