By Bobby Yazdani, Founder & Partner at Cota Capital
Many startups believe that cloud cost optimization is a future concern linked to scale rather than an issue that calls for action early on.
However, lessons learned this year – from increases in cloud pricing and the rise of gen AI and its impact on cloud economics – underscore that startups should prioritize cloud cost optimization from the get-go. That’s because this technology can significantly extend a company’s runway and give back precious time to be used in mission-critical initiatives, such as finding a product-market fit.
Keeping in mind industry trends that crystallized in 2023, it is clear that the cloud sector is headed toward a future in which cost visibility, control, and optimization will become top priorities for companies of every size and at every stage.
The Cloud Industry in 2023: A Recap
Cost Management as the #1 Challenge
Cloud computing is essential for driving innovation. Even if the danger of economic instability has not hindered cloud adoption or investment, more organizations have become aware of and concerned about their rapidly growing expenses in this area. Cloud computing often represents a significant chunk of operating expenses, running into the tens of thousands of dollars per month; even for startups.
A recent survey showed the extent to which companies struggle with cloud cost control. A staggering 82% of respondents identified managing cloud spend as their top challenge, overtaking cloud security initiatives for the first time in a decade. The self-estimated wasted cloud spend looms at a concerning 28%, indicating significant room for improvement.
Escalating Cloud Service Pricing
The cost of operating in the cloud has seen an unprecedented surge this year, and increases in cloud pricing put pressure on organizations to rethink their cloud investment strategies.
Spot instances, a staple for startups looking to reduce their cloud costs, have also become more expensive – their pricing grew by 128% across three major AWS regions. A paradoxical trend was evident in the US Producer Price Index (PPI), which revealed a 2.3% increase in cloud services costs since Q3 2022 – contrasted with the 3.9% monthly drop in the cost of computers and servers.
The Impact of Gen AI on Cloud Economics
The rise of generative AI reshaped the economic landscape of the cloud. This burgeoning demand led to gen AI budgets growing 3.4x larger than anticipated, coupled with a shortage of Virtual Machines (VMs) with GPU chips, prompting startups to take extraordinary measures to secure these critical components. The cost of OpenAI’s infrastructure on Azure is an example of how a company managing its own LLMs can see its daily cloud bill soar to $700,000.
A projected $76 billion increase in gen AI data center and infrastructure costs by 2028 underscores the profound impact of this technology on cloud economics.
Strategic Cloud Imperatives for Startups in 2024
Achieving Cloud Cost Visibility and Driving Accountability
In the evolving cloud landscape, many organizations are redefining their focus to scrutinize costs, often questioning whether the cloud may end up costing more than on-premises resources.
To increase accountability among engineering and DevOps teams, managers often seek flexibility in allocating costs to specific business units. Cloud cost monitoring and FinOps solutions emerged to address this need and allow companies to implement more complex methods of measuring and managing cloud costs.
However, let us not forget that the ultimate goal here isn’t gaining a crystal-clear understanding of cloud expenses; it’s reducing them. The sheer amount of effort and time poured into achieving cloud cost awareness may render any cost reductions realized in the process obsolete. Automation is a method that has shown considerable benefits when applied to numerous areas of cloud operations.
Implementing Automated Cloud Cost Optimization
The strategic foresight of startups should manifest in early and efficient cost control and optimization measures. Companies should do their best to build a culture of cost consciousness among both technical and business teams from the start.
Luckily, startups and SMBs can rely on specialized automation and AI tooling to rationalize cloud operations. While they might be tempted to experiment with open-source software for managing cloud costs, this choice involves quite significant expenses in terms of the time and effort required to install, configure, and maintain the solution. Delegating scarce and precious engineering resources to the task of tinkering with open-source software is likely to invalidate any potential cost savings achieved this way.
A good example of a third-party automation solution is CAST AI, a platform that helps teams understand their expenses and then automatically reduces them using a mix of autoscaling, automated rightsizing, and spot instance automation.
At Cota Capital, we believe that the combination of real-time cost visibility and automated optimization is a game changer in the field. This is why we led the CAST AI Series A funding round and are excited about the company’s growth journey.
Balancing Innovation and Cost Optimization
Navigating the cloud landscape calls for balancing innovation and cost optimization. Organizations can no longer push applications to the cloud without refactoring or optimization and hoping for the best. We have seen this approach result in massive cloud bills.
Achieving balance in this context involves two steps:
- First, organizations should implement initiatives to eliminate redundant, overprovisioned, or unused cloud infrastructure.
- Second, it is important to put more effort into updating the infrastructure to make the most of cloud platforms and lead a shift toward more cost-efficient cloud-native technologies.
Conclusion
Deferring cloud cost optimization is a serious mistake that no startup can afford to make in 2024. The present landscape, characterized by escalating cloud expenses and the transformative influence of gen AI, demands an immediate recalibration of priorities.
By embracing automated, proactive cost-cutting measures and finding the optimal balance between innovation and cost optimization, startups cannot only extend their runway but also fortify their foundation for sustained success in the changing cloud economy. Unlocking product-market fit and achieving sustainable business growth starts now, not tomorrow. The key lies in meticulous cloud cost management, ultimately aiming for complete automation.