In July, Swedish payments company Klarna posted a $6.7 billion fall in value, down from $46 billion in June 2021. The buy-now-pay-later company – once seen as Europe’s most valuable private technology company – registered its first large-scale layoffs in May when it cut 10% of its workforce. Similarly, Gorillas, the once fast-growing fast food delivery startup in Berlin, recently laid off 300 employees.
Between the global economic downturn and the poor performance of the public market, the European tech world is currently facing a major decline in risk finance, which is sliding to its lowest point in nearly two years. Investments in start-ups in the EU for the third quarter totaled $16 billion 44% year-over-year decline of $28 billion in the third quarter of 2021.
Rising inflation, the war in Ukraine and the energy crisis in Europe are increasing costs for companies while at the same time making it more difficult to attract new customers.
With pressure from VC firms mounting, startups are now bracing for potential hardship by cutting costs. This has led to mass layoffs across the industry and a shift to lean spending strategies. But as founders revise budgets up and down to cut as much as possible to stay afloat, one major expense has remained largely untouched: cloud services.
While the shift to the cloud was designed to reduce computing costs, many companies that have adopted these services are facing a surge in spending. Contract locks and exit fees make it impossible to leave. In reality, some quarrel that the cloud could cost many companies more than it actually generates.
EU startups’ dependence on ‘big three’ cloud providers
While the shift to the cloud was a novel approach just a few years ago, it has quickly become a necessity to stay competitive in our data-driven world.
Without the capacity to handle all this incoming data, many companies have moved their office software, databases, payroll programs and customer websites to third-party cloud providers, with US-based Big Tech companies holding most of the market. Dates from Research group Synergy shows that Amazon Web Services (AWS), Google Cloud Platform (GCP) and Microsoft’s Azure make up 72% of the EU cloud market.
The problem for startups is that many of these big cloud providers make it free to transfer data to their cloud architecture, with no entry fees charged. But as a startup’s cloud needs fluctuate with the ebb and flow of the business, many later find themselves paying an exit fee to remove their data from the system. Those who can’t afford the fees should simply keep their data where it is, essentially being tied into the contract.
Currently AWS loads between $0.08 to $0.12 per GB in outbound costswhile Google Cloud and Microsoft Azure are charged $0.08 and $0.05 per GB for intercontinental data transfers from North America to Europe.
According to Yann Lechelle, CEO of the EU-based cloud provider Scale roadstartups often accept six-figure cloud credits from AWS, GCP, and Azure and adopt products and services they don’t always need because they seem free.
You may have credit, but sooner or later you will have hefty bills to pay.
Not only does this prevent startups from moving their data as business needs change, as we’ve discussed in the past, but relying on a single cloud service provider is risky, both in terms of security and potential for failure.
Because cloud infrastructure is owned and managed by the service provider, companies often feel they don’t have enough control. In reality, 65% of French startups feel they are too dependent on GAFAM services.
European startups need a paradigm shift
EU policymakers were not aware of this. After a long, drawn-out discussion between stakeholders and civil society, the European Commission has adopted the European Data Law in February 2022, which, among other new data regulations, also looks at improving the interoperability of data services by addressing the costs associated with switching suppliers.
The law specifically targets Big Tech’s monopoly in the market and specifically states:
SMEs are protected against unfair contract terms imposed by a party that has a significantly stronger market position.
However, the provisions have not yet been adopted and discussions at EU level are ongoing. Some concerns that the provisions do not go far enough to improve interoperability and market conditions for cloud providers in the EU. In the meantime, others are concerned that exceptions will be made for certain providers.
Whatever happens at the regulatory level, there are some things startups can do to optimize their cloud spend.
What startups can do
Cloud can be a game changer, but you need a solid strategy and constant oversight to really make it work for your business.
According to to Miguel Angel Borrega, Senior Director Analyst, Gartner:
By 2024, 80% of companies unaware of the mistakes made in cloud adoption will overspend by 20 to 50%.
Many VC firms are encouraging their portfolio companies to make proactive decisions that can help them navigate the current downturn. One way to stay in line with both budget and operational needs is to evaluate your workload to better understand how cloud costs can match business performance goals. This doesn’t mean skimping on quality and features, but choosing the cloud providers and products that best suit your business needs.
Here are a few tips to follow:
Build a smart multi-cloud strategy
Instead of relying on a single cloud provider, many startups are now adopting multi-cloud strategies across multiple vendors. The cloud space has seen new innovations in recent years and beyond 93% of enterprises are already using a multi-cloud strategy in one form or another.
Consider which parts of your business data should be stored on public versus private servers. Determine which cloud vendors are best for the needs of your different departments. For example, you may need more storage space and functionality for your logistics operations versus HR.
Check out our guide to building a multi-cloud strategy here.
Take advantage of reserved instances and other discounts
One of the best things about building a multi-cloud strategy is getting the most out of the various reserved instances and other cost-saving features on offer. Significant discounts may also be available for companies making large investments with a single provider, but the downside to this is that the discounts often come with vendor lock-in. This makes it difficult or more expensive to switch to other cloud providers when they want to.
Startups can avoid this situation by starting with a small set of applications to find out what works best. This way, you can walk away from what doesn’t meet your company’s needs, without committing to a particular cloud service.
Look at cost-effective cloud technology
Numerous cloud providers today offer products and services that help startups achieve significant cost savings. For example, serverless technology incurs costs only when it is used, so you are not paying for an ‘always-on’ service. Kubernetes autoscaling allows resources to be added when needed, such as during website traffic spikes, and removed when not, meaning that again you only pay for what you need.
Join the “Next 100 Startups” program.
European startups can also benefit from Scaleway’s new program: The next 100 startups shaping the future of Europe. The program is aimed at identifying Europe’s next 100 unicorns and will partially cover these companies’ cloud costs over a 24-month period to help them reduce their burn rate and help them achieve autonomous success.
According to Lechelle:
As entrepreneurs we are optimistic, we see no barriers. You use that mindset to help you move forward. But there’s always a reality check at some point, and that’s the cost. Cloud credits encourage people to build things as if they cost nothing. You may have credit, but sooner or later you have to pay the bills. That’s why we’ve created a new downward discount rate so you can reduce your expenses in two years.
The program is open for applicationsso apply now!