Corinne Riley | Funding the Cloud Challengers | Summary and Q&A

TL;DR

The cloud computing market has seen an increase in VC funding for challenger startups specializing in AI/ML services, data and analytics, security, observability, and API management.

Key Insights

• 😃 Challenger startups have managed to compete with big cloud providers in specific sectors by offering specialized solutions and targeting niche markets.
• 🐕‍🦺 VC funding has poured billions of dollars into challenger startups in sectors such as AI/ML services, data and analytics, security, observability, and API management.
• 😃 The AI/ML sector has seen the highest number of services provided by big cloud providers, but challenger startups have been able to gain market share with innovative applications and infrastructure.
• 🪛 The data and analytics sector has experienced increased investment, driven by the need for data-driven decision-making and improved analytics capabilities.
• 🔒 Security startups have benefited from increased spending on security tools during the pandemic and the migration to the cloud.
• 🍉 The observability market is underserved in terms of VC funding, but there are opportunities for challengers to provide more sophisticated and comprehensive products.
• 🔠 The API management and development market, despite its potential, has not attracted significant VC funding.

Transcript

hi this is heather mack head of editorial at greylock the following podcast is from our new project castles in the cloud you can find more at greylock.com castles hi everyone welcome to gray matter the podcast from greylock where we share stories from company builders and business leaders i'm corrine riley an investor at greylock this is an audio v... Read More

Questions & Answers

Q: How have challenger startups managed to compete with big cloud providers in the AI/ML sector?

Despite the dominance of big cloud providers like AWS, GCP, and Microsoft Azure, challenger startups have been able to offer specialized AI/ML solutions, targeting specific industries or enterprise applications. By focusing on end-to-end ML infrastructure or applied AIML in enterprise-specific applications, they have gained market share and competed directly with the incumbents.

Q: What are the key trends in the data and analytics sector?

The data and analytics sector has experienced significant VC funding, with challenger startups providing tools for data warehousing, data governance, data privacy, and data cataloging. These startups are solving the challenges of managing and analyzing large and disparate datasets, enabling organizations to gain valuable insights and improve data-driven decision-making.

Q: How has the COVID-19 pandemic affected VC funding in the security sector?

Despite initial forecasts of decreased IT spending, enterprises actually increased their investments in security tools during the pandemic due to the shift to virtual work and the acceleration of cloud migration. This led to substantial VC funding in cloud-native security platforms, endpoint platforms, privacy management solutions, and centralized access control with compliance workflows.

Q: Why is the observability market underserved by VC funding?

The observability market has seen relatively low VC funding compared to other sectors, possibly due to strong competition from big cloud providers that already offer observability services. However, there are still opportunities for challengers to provide more complex and comprehensive observability products that can handle larger and more diverse data environments.

Summary

This podcast episode discusses the funding trends for challenger startups in the cloud industry. It highlights five key trends: the increase in AI and ML services and funding, growth in data and analytics startups, increased funding into security services, the maturation of observability startups, and the untapped potential in the API tooling market.

Questions & Answers

Q: What are the trends in AI and ML services and funding?

The potential impact of artificial intelligence and machine learning has prompted both big cloud providers and challenger startups to invest in this sector. Venture capital dollars amounting to $4 billion have been invested in challenger startups in this space. Despite the significant advantages of cloud providers, challengers have been able to command large market shares by focusing on end-to-end ML infrastructure or enterprise-specific AI applications.

Q: How is the funding landscape for data and analytics startups?

Venture capital investors have poured around $3 billion into challenger startups in the data and analytics sector. These startups offer a range of standalone solutions for data warehousing, data lakes, data quality, governance, privacy, and cataloging. They provide tools that enable data scientists and developers to perform analytics on their data in a secure and compliant way. While cloud vendors may enhance their own analytics capabilities, the private sector is at an inflection point, with immense spending and talent in this area.

Q: What is the current state of funding for security startups?

Investment in startups operating in the security sector has grown considerably, with over $3 billion invested between 2019 and 2020. These challenger startups, valued over $500 million each, are competing with 25 services from big cloud providers. The COVID-19 pandemic accelerated cloud migration and led to increased spending on security tools. Startups focused on cloud security posture management and cloud workload protection platforms have seen significant investment. The identity and authentication sector has also matured, leading to potential consolidation in the future.

Q: How are observability startups faring in terms of funding?

Observability startups, which offer cloud monitoring and insights, have seen lower investment compared to other sectors, with around $300 million invested in the past two years. The strong competition from cloud vendors, such as Azure and AWS, who offer their own observability services, is one reason for the lower VC investment. However, there is still a need for challengers to provide more complex and comprehensive observability products that can compete with the incumbents. Startups like Chronosphere have shown promise in this space.

Q: What is the current state of the API tooling market in terms of funding?

The market for API management and development has not seen significant growth in VC investment. Only around $400 million was invested in this market between 2019 and 2020, with fewer than five major challenger startups. The dominance of big cloud providers in the API gateway space, along with their easy integration with existing services, has made it challenging for challengers to compete. However, there are opportunities for challengers in areas like API management, tracking, and security.

Takeaways

The trends in AI and ML, data and analytics, security, observability, and API tooling indicate areas of interest for challenger startups in the cloud industry. Despite the massive moats of the big cloud providers, VC funding and market opportunities exist for challengers in certain sectors. AI and ML, as well as data and analytics, are particularly attractive due to the vast market potential. Security remains a pressing concern, leading to continued investment in challenger startups. Observability and API tooling markets have seen less funding, but there is still room for challengers to make an impact. As the cloud industry evolves, more opportunities for founders are likely to emerge.

Summary & Key Takeaways

• Challenger startups are competing with big cloud providers in various sectors, including AI/ML services, data and analytics, security, observability, and API management.

• VC funding has poured billions of dollars into challenger startups in these sectors, indicating the market's potential.

• AI/ML services have seen significant investment, with 74 services offered by the big three cloud providers, but challengers have managed to gain market share by offering specialized solutions.

• The data and analytics sector has also attracted substantial investment, with challenger startups providing innovative tools and applications for data warehousing, data governance, and data privacy.

• Security startups have benefited from increased spending on security tools by enterprises during the COVID-19 pandemic, particularly in cloud-native security platforms and endpoint platforms.

• Observability and API management are still underserved markets, with VC funding relatively low. However, opportunities exist for challengers to provide more sophisticated and complex solutions in these areas.