Dependence on the "Big Three" Cloud Providers is Hindering the Growth of EU Startups

Europe’s world of tech is currently facing a major decline in venture funding, sliding to its lowest point in nearly two years.

FREMONT, CA: The global economic slowdown and subpar public market performance are causing a significant drop in venture capital in Europe's tech sector, reaching its lowest level in almost two years. The third quarter saw USD 16 billion invested in EU startups, a 44 per cent decrease from the USD 28 billion invested in the third quarter of 2021.

The war in Ukraine, the energy crisis in Europe, and rising inflation are all driving up prices for businesses while also making it harder to draw in new clients.

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Startups are increasingly preparing for probable problems by lowering spending as pressure from VC companies intensifies. This has caused widespread industry-wide layoffs and a shift to lean spending tactics. However, one significant expenditure has been relatively unaffected as founders evaluate budgets from top to bottom to cut costs as much as possible to stay afloat: cloud services.

Although moving to the cloud was meant to save computing costs, many businesses that have done so are now experiencing increased spending. Egress fees and contract lock-ins make it impossible to leave. Others contend that many firms may pay more to use the cloud than they do to save money.

EU startups’ Dependence on ‘Big Three’ Cloud Providers

Although moving to the cloud was a unique strategy only a few years ago, and it has now become essential to remain competitive in our data-driven world.

Many companies have moved their office software, databases, payroll applications, and customer websites to external cloud providers because they cannot manage all of this incoming data. US-based Big Tech companies dominate this industry. Microsoft's Azure, Amazon Web Services (AWS), and Google Cloud Platform (GCP) account for 72 per cent of the EU cloud market.

The issue for startups is that many of these big cloud providers don't charge any ingress fees and offer free data transmission to their cloud architecture. However, because a startup's cloud requirements change as its firm grows and shrinks, many later discover they must pay egress costs only to get their data out of the system. Those who are unable to pay the fees must just leave their data in its current location, thereby locking them into the contract.

For intercontinental data transfers from North America to Europe, AWS now charges USD 0.08 to USD 0.12 per GB in egress fees, whereas Google Cloud and Microsoft Azure charge USD 0.08 and USD 0.05 per GB, respectively. Startups sometimes accept six-figure cloud credits from AWS, GCP, and Azure and take on products and services they don't always need since they look free. As they've previously discussed, this prevents entrepreneurs from relocating their data as their business demands evolve. Additionally, relying on a single cloud service provider is problematic regarding security and the possibility of outages.

Businesses frequently feel they don't have adequate control over the cloud because the service provider owns and manages the infrastructure. 65 per cent of French startups believe that their reliance on GAFAM services is excessive.

European Startups Need a Paradigm Shift

The EU's policymakers were aware of this. In February 2022, the European Commission unveiled the European Data Act, which, among other new data regulations, aims to improve data service interoperability by addressing costs related to switching vendors. This came after a protracted, drawn-out discussion between stakeholders and civil society.

The Act mentions the following about Big Tech's monopoly on the market:

However, due to ongoing debates at the EU level, the requirements have not yet been approved. Some are concerned that the requirements don't go far enough to enhance market conditions and interoperability for EU cloud providers. Others worry that specific providers will receive exclusions, though.

There are some things startups can do to maximise their cloud spending, regardless of what occurs at the regulatory level.

The cloud can be a game changer for an organisation, but you need a solid plan and ongoing management to make it effective.

The portfolio companies of several VC firms are being urged to take preemptive measures that will aid in navigating the present crisis. By assessing workload, firms may better understand how cloud charges can correspond to business performance goals, which will help them stay in line with budgetary and operational requirements. This doesn't entail sacrificing quality or functionality but rather picking the cloud service providers and products that are best suited to your business's requirements.

Build a smart multi-cloud strategy

Many startups are now exploring multi-cloud strategies among different suppliers rather than relying on a single cloud provider. Over 93 per cent of businesses already employ a multi-cloud approach in some way, to recent advancements in the cloud field.

Think about which information about your company should be kept on private vs public servers. Choose the best cloud service providers for the requirements of your various departments. For instance, logistics operations can require more storage and functionality than your HR activities.

Take advantage of Reserved Instances and Other Discounts

Making the most of the many reserved instances and other available cost-saving capabilities are one of the finest things about developing a multi-cloud approach. Companies making major expenditures with a single provider may also be eligible for sizable savings, although this has the drawback that the reductions frequently entail vendor lock-in. When they decide to migrate to another cloud provider, it becomes more difficult or expensive to do so.

Startups can avoid this scenario by experimenting with a limited number of applications to see which ones perform best. In this manner, they are not compelled to commit to a specific cloud provider and can abandon anything that does not meet the needs of the business.

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