“There’s a big wave of innovation in managing cloud costs,” Team8 co-founder and managing partner Liran Grinberg told TechCrunch as part of our latest cloud investor survey.
Having noticed tailwinds for the wave of B2B startups that offer cloud cost-optimization solutions, and cloud management more broadly, we were curious to know where VCs thought the space was headed — and the answers we heard show promise.
Indeed, the tailwinds we are referring to aren’t limited to the current macroeconomic climate. The need to better manage cloud spend is undoubtedly fueled by the downturn, which makes everyone more cost-conscious. But, as we will explore, innovation in this field is also a corollary to broader trends, such as the rise of product-led growth among B2B SaaS companies, which have become both practitioners and consumers of usage-based pricing.
There are also reasons to think that we haven’t seen all of it yet. “We continue to see tremendous opportunity in the cloud management space given how early we are in the cloud adoption journey,” Battery Ventures venture investor Danel Dayan said. So what might be next? Let’s dive in.
Beyond cost optimization
The first wave of cloud optimization solutions did the obvious: help companies track and lower their cloud spend. Per Team8’s Grinberg: “The first generation of cloud cost management (represented by Cloudability, CloudHealth) helped provide visibility and clarity on the spend on AWS, Azure and GCP. Meanwhile, cloud cost-optimization tools (represented by Spot, Granulate) allowed for tactical changes to lower costs.”
Consolidation followed, TechCrunch’s Kyle Wiggers noted, “as incumbents in adjacent sectors saw the opportunities presented by cloud cost optimization. Microsoft in 2017 acquired Cloudyn [ … ]. Then, in 2019, Apptio snatched up [ … ] Cloudability, while VMware and NetApp bought CloudHealth and Spot (formerly Spotinst), respectively, within the span of a few years.” And this April, Intel bought Granulate for $650 million.
As time and mergers went by, it became clear that there was more than startups in this space could do for their customers. First and foremost, cloud teams required more than cost optimization — they needed cloud management.
As Boldstart Ventures partner Shomik Ghosh observed, “cloud management spans security, serverless workloads, edge computing, workload orchestration, etc. Every one of these areas is constantly shifting and startups are innovating around it.”
But even within the narrower scope of cloud-spend management, demand and offerings have evolved to answer a key change at play: that cloud spend has turned into a companywide, strategic matter.
From cloud operations to FinOps
If Grinberg alluded to a first wave in this category, it’s because he thinks we are witnessing another one. He told TechCrunch that “this new wave, referred to as Cloud Cost Observability for FinOps, and represented by companies such as Finout, sits at the intersection of the CFO and CTO organizations, and supports strategic decision-making, not just saving cost.” (Team8 is an investor in Finout.)
Let’s unpack this quickly: If cloud spend matters both to CFOs and to CTOs, it becomes an issue that multiple teams need to navigate together. Hence the term FinOps, a portmanteau of DevOps and finance, which describes the cultural practice of having organizations collaborate on cloud financial management.
3 guiding FinOps principles that will help you explain cloud costs to the board
As for the link between cloud spend and strategic decision-making, it is the logical consequence of the transformations that the enterprise market underwent over the last few years. Among these, as we mentioned, are the rise of product-led growth and usage-based pricing.
What does product-led growth have to do with cloud spend? Quite a lot, it turns out. Think of companies that acquire most of their customers through a freemium tier, for instance: Chances are their customer acquisition cost (CAC) has little to do with marketing expenses and a lot with cloud spend — which becomes crucial to measure accurately.
Usage-based pricing, however, adds complexity to cloud-expense tracking, especially considering the proliferation of cloud services that use this consumption-based model rather than seat-based pricing.
From Snowflake and Twilio to Stripe and Datadog, usage-based priced services “often represent dozens of percentages of an organization’s spend in the cloud,” Grinberg said. “Combined,” he added, “they represent the COGS (cost of goods sold) of the modern enterprise.” This creates new needs for companies, he explained:
The spend across all these platforms needs to be abstracted to one “mega bill” so enterprises can make sense of it. It also needs to be smartly correlated with the product offering so you can derive “What’s my cost per feature?” and design your pricing accordingly.
Further, it must be correlated with business metrics so you can derive “What’s my cost per customer?” and “What’s my gross margin per customer?” This makes it possible for you to cluster your customer base across healthy, profitable customers versus low-margin customers and change your go-to-market strategy accordingly.
Integrating cloud spend into business strategy: That’s certainly promising. But is FinOps the end of history for cloud management? Not so fast. As Grinberg mentioned, this new wave is also tied to the concept of cloud-cost observability, whose name itself goes to show how much cloud management still has to do with the engineering side of businesses.
Beyond FinOps
Dayan’s expectations for cloud management would bring the sector closer to data management. At the moment, he said, “cloud management solutions primarily focus on four key characteristics: cost allocation, cost monitoring, optimization and governance.” But with maturing cloud adoption, he said, there is a fifth characteristic emerging: control.
“We fundamentally believe customers want the benefits of the cloud (speed, cost, flexibility, etc.) but also want the control of where to run things and how,” Dayan told us. “Companies like Cribl have done this for running observability data (logs and metrics) and others like Bluesky Data are emerging to do the same for data living within data lakes.”
Dayan and his team have a prediction based on this fifth element: They “think the innovation going forward will be around intelligently collecting, routing and transforming the right data before it even gets stored in cloud providers or data lakes.”
Dayan’s comments imply that cloud management would be moving in two directions: Closer to engineering and upstream in the decision-making process. Our understanding is that Quiet Capital founding partner Astasia Myers agrees.
“Historically,” Myers wrote via email, “cloud cost-management solutions focused on two personas: financial operations (FinOps) and cloud operations. We are now seeing a shift where cost management solutions are tied to developer workflows via CI/CD and pull requests (PRs) to show the cost impact of the specific changes pre-deployment. This increases visibility for the end user and improves ownership around decisions to hopefully generate smarter choices.”
Menlo Ventures partner Tim Tully concurred, and he is already seeing this new wave in the market. “The next generation of startups is starting to do a fantastic job of forecasting spend on a per-release basis as part of a developer’s CI/CD pipeline.”
Forecasting can take many forms, leaving the door open to more innovation. For Tully, “plenty of white space remains to solve these problems, including making recommendations on how to optimize resource allocation better, and, ideally automating the optimization for the developer.”
The idea that cloud cost observability could meet automation is definitely enticing, so we will keep our eyes wide open — between the transformation of SaaS and broader cloud adoption, there is clearly plenty of space for cloud management to keep on evolving.
Comment