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Virtustream in the Mainstream: What Might SAP's Investment Mean for the Future of Hybrid Cloud?

by Marc Mosca

September 10, 2013

Marc Mosca, Research Analyst, Wellesley Information Services

One thing that the seed round of venture capital funding probably covers for a new, exciting Infrastructure-as-a-Service company is a scalable web-hosting solution.  After all, one possible positive outcome for both the company and its new investors is that The Market begins to take notice of its product and generates Buzz which. Buzz allows the company to raise new capital and further develop that innovative IaaS solution. If that startup is really successful, it might even land in Gartner’s Magic Quadrant and attract the interest and investment of an exponentially larger firm looking for a way to entice its customers into moving their mission-critical systems to the cloud.

Jumping into a Series D offering with what amounts to pocket change is not the most speculative investment SAP could make. After all, by the fourth round of funding and after four years in business, Bethesda, Maryland-based Virtustream should be expected to have reached some maturity in process and practice. The conversation should be less about the raw potential of its concept than it is about the expected future direction of the company and its products. That direction looks intriguing, for both Virtustream and SAP, but if Walldorf needed a reminder not to expect too much, too fast from this young company, it certainly came when The Market read the headlines this morning, generated an abundance of Buzz, and then this happened:




 

Challenges like this arise when a lauded but relatively small company suddenly has a story on CNBC’s website. The most likely cause is, of course, that an increase in connections to the site surpassed the design limits, rather than a problem at a platform host or some third party provider.1 But this error highlights perhaps the simplest risk the enterprise faces when moving any mission-critical system to the as-a-service model, and it is the same risk that SAP is hoping Virtustream’s product can eventually mitigate for its customers: A move to the as-a-service model necessitates some loss of control for the enterprise’s IT team, and the risk that loss of control poses is difficult to estimate, much less mitigate.

Virtustream’s product offerings can be separated into three lines: A “standard” public cloud with multiple data center locations and backup sites in the US and Europe; SpotCloud, a cloud resources exchange2; and xStream, the company’s cloud management software. xStream would seem to be the most interesting technology to SAP, both as an investor and as a potential future property.

Virtustream’s materials on xStream show an explicit company- and development-focus on the hybrid cloud, an area many cloud providers have neglected in favor of moves to their own, public or private solutions.  Large-scale adoption by large enterprises of a single, uniform cloud solution seems increasingly unlikely.  The loss of control over a portion of the solution creates a difficult-to-measure risk that is somewhat analogous to the one Virtustream faced with its website this morning: At the critical moment, can the service providers be trusted to provide the same responsiveness and quality the enterprise’s own team could have achieved? xStream attempts to address this concern by assuming a hybrid cloud and developing a unified monitoring platform to maximize visibility and allow for some measurement of the risk and requirements of both private and public cloud offerings. One might even notice some parallels between xStream’s niche in cloud and Afaria’s in mobile.

This may or may not be particularly innovative, and it may or may not address customers’ concerns well enough to entice business critical systems into the cloud, but Virtustream appears to at least be heading in a direction that interests SAP enough to invest $40 million. If they are able to overcome the challenges posed by growth and deliver a mature solution as expected, Virtustream could well be on the receiving end of a substantially larger bid for more (all) of the company and its xStream IaaS solution in the future.

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1Or maybe not. A quick Google search reveals this was an ongoing problem between 2011 and early 2013 with Drupal. Most cases were eventually revealed to be sloppy coding or simply left unsolved. I'm interested to hear from someone with better PHP or SQL experience than my own what may have caused this problem for Virtustream. Plenty of people were scratching their heads and wondering who the company was when the news crossed the wires this morning. Losing your website after a news headline is not the most effective business development strategy for an IaaS provider.

2This market is actually about to get some big name competition. Reuters reported in July that the Deutsche Böerse is preparing to commoditize cloud computing by launching an exchange. Given the focus earlier this summer on whether cloud providers are really utilities, it will be interesting to see if the exchange is a viable business line for Virtustream when the Böerse enters - and whether FERC takes interest in the US.

Also, imagine the revenue possibilities if Virtustream's cloud exchange was combined with, say, the Ariba platform. 


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