How Cutting Cloud Costs Can Help Startup Fundraising

The U.S. startup ecosystem has changed dramatically in the last few months, with persistently high inflation and rising interest rates portending an era of stricter financial conditions. In this new environment, it will be increasingly difficult for startups to raise money from investors.

One key way that startups can become more attractive to investors is by reducing their burn rate — the rate at which they are spending money. And one area where startups can make significant cuts is in their cloud costs.

Why Startups Fail

Every year, thousands of startups launch with the hope of becoming the next big thing. But the vast majority of them fail. Even among venture-backed startups, 75% fail to return capital to investors.

The idea of the "burn rate" is key to understanding why startups fail. A startup's burn rate is the rate at which it is spending money. If a startup has a high burn rate, it will run out of money quickly.

According to the U.S. Bank, __82%__of failed businesses cite cash flow problems as a factor in their failure. A startup can quickly burn through its initial funding if it is not careful.

If a startup finds itself in this situation, it has two options: raise more money or cut costs. But neither of these options is easy. Raising more money is difficult, as investors are often reluctant to put more money into a failing company. And cutting costs can be just as hard, as it can mean laying off employees or cutting back on important R&D spending.

Why Startups Run Out of Cash

According to a 2018 study by Brex, the median burn rate for Series A startups is around $400,000 per month, or almost $5 million a year. The average Series A round among top firms was $15.7 million thatyear, meaning that even well-funded startups are burning through cash quickly.

Tech startups, in particular, face a number of headwinds that can contribute to a cash crunch. For one, they often require expensive hardware and software to get off the ground. They may also need to pay for office space and hire engineers, which can be costly.

Cloud costs, too, can quickly eat into a startup's budget. The average SaaS startup (up to 100 employees) spends a staggering $1.16 million a year on the cloud, according to a 2020 study by Harness.

Even if a startup is generating revenue, it may not be enough to cover all of these expenses. This is one of the main reasons why startups run out of cash and have to raise more money from investors.

Startup Funding is Decreasing

Compunding the problem, startup funding is on the decline.

Amidst persistently high inflation and rising interest rates, venture capitalists have become more cautious with their investments. After all, major banks are predicting a prolonged downturn in the economy, which could lead to fewer exits and lower valuations for startups.

This has led to a decrease in VC funding for startups. In April of this year, venture totals set roughly a 12-month low, following a peak in November of 2021, representing a decline of $5 billion from March to April alone.

What's more, the average valuation is also declining, alongside recent IPOs in tech startups seeing sharp selloffs. Lower valuations make it more difficult for startups to raise money from investors, maintain morale, and even incentivize new hires.

Startups Need to be More Efficient with Their Cloud Spend

In recent years, the costs of infrastructure underlying storage, networking, and computing have dropped significantly. For example, hard drive prices have dropped from around $500,000 per gigabyte in 1981 to less than $0.03 per gigabyte today.

While cloud providers have passed on many of those savings, there's still a lot of room for improvement. In fact, a study by Gartner found that many organizations are overspending up to 50% on their cloud bills. Moreover, cloud providers are even increasing their prices in some cases, with GCP doubling some of its fees recently.

The bottom line is that startups need to be more efficient with their cloud spend. They need to find ways to optimize their usage and cut costs where possible.

Fortunately, there are a number of ways to do this. Startups can use cloud management tools like Usage.AI or AWS Cost Explorer to help them optimize their usage and control costs. They can also take advantage of reserved instances and other cost-saving features offered by cloud providers. In one case study, a firm is saving $1 million a year on AWS costs using flexible reserved instances.

And, of course, they can always negotiate with their cloud providers. This is something that more startups should be doing, as it can lead to significant savings.

In the current economic environment, it's more important than ever for startups to control their burn rate. And one of the best ways to do this is by reducing their cloud costs. By becoming more efficient with their cloud spend, startups can make themselves more attractive to investors and increase their chances of success.