A Product Market Fit Show | Startup Podcast for Founders
00:15:57 · Steve Tuck
[00:15:57] S0: No, they're not for sale. These amazing machines are not for sale. And it would have truly been the hand of God reaching down in the midst of this five country build out we were doing if we could get a hold of these modern appliances that apparently the best companies in the world have been running on for seven years. And that was where kind of the first deep seeds, we wouldn't know it at the time, but like looking back on it, I think that painful realization coupled with the fact that it's so hard to build high quality, reliable, automated systems when you've got this kind of kit car approach of hardware and software, that we would land on this realization that the same machines that power the cloud need to be available for those that want to operate on-prem, that want to own and control their own infrastructure, that want economics that are massively different than the rental economy of cloud computing, that want, you know, systems and data that no one can access. And yet to do that today for the nearly 60% of IT infrastructure that runs outside the public cloud, you have to go back in time like 20 years and you have to absorb all this overhead in your business to buy these disparate pieces and weave them together. And then, you know, if anything breaks, by the way, you're the only one running that combination of things on the planet. You're the only one responsible for it. And it was in these years that we really realized like cloud computing is the future of computing. Cloud computing is an architectural concept, not a rental concept. And that the machines that power the cloud need to be available in product form to kind of transform the on-prem IT economy, which is huge. $100, $150 billion growing as the economy moves online.
00:17:40 · Pablo Srugo
[00:17:40] S1: What is, by the way, on the, for the on-prem, like there's a security reason to stay on-prem. There's a cost reason. Like what are the top, you know, two or three reasons why some of the big, big enterprises are going to keep some of that payload for always, you know, on-prem.
00:17:54 · Steve Tuck
[00:17:54] S0: Security is one. Just, just that governance and understanding that you can verify no one has touched these systems. So you can put subsets of data there and know exactly, you know, how it's being used and who is accessing it. Economics is a big one. Like there's a reason that people lease apartments and buy homes instead of everyone living in a hotel room. You know, when you have a certainty around a subset of usage over years, then owning is not just a little bit more cost effective. It's orders of magnitude. And then there is latency reasons. You know, we have customers that running infrastructure that's collecting data from their own factories and data centers and systems that they need to aggregate locally and make decisions on in real time. And so latency can be a key contributor. And then for software companies, you know, cloud SaaS companies, AI labs, it is the ability to sell the new markets. You know, if you're trying to provide services to a bank and you run explicitly, you run your SaaS platform in the public cloud, you're only going to get a percent of that bank's data. But if you can bring that into a single tenant on-prem model, you now can service the entirety of that bank's data. And so in regulated industries, there's actually an interesting emergent kind of angle that we have heard from customers, which is business growth, is expansion to new markets, being able to grow the top lineup.
00:19:24 · Pablo Srugo
[00:19:24] S1: But who pays for the rack in that example? Like if Salesforce is selling into a bank, maybe that's a bad example or not. You can tell me, are they buying that on-prem rack and putting it inside? Like how does that work? Where are the economics?
00:19:36 · Steve Tuck
[00:19:36] S0: It really depends on that software company. You've got some that the end customer is buying it and it's kind of a blueprint, right? It's like a reference architecture where that, you know, database service runs on top of this cloud-like appliance in ways that are familiar to how it was running in AWS. And then in other cases, you'll have cloud SaaS companies that are going to stand up their own owned single tenant environment where they operate the whole thing. And they operate it in a cage adjacent to a large bank or, you know, a federal agency or, you know, an industrial or biotech company. And so those are the use cases that I kind of get most excited about because they're not about just like saving dollars. Like, sure, I mean, everyone likes to improve the cogs of their business and the op-ex of their business, but where you can find opportunities that where businesses can go faster, can grow faster, can go enter into new markets without being a hundred percent constrained by a service provider that you depend on. Another anecdote for you was talking to an AI lab last night and they can't get capacity on the public cloud right now. They're not big enough to fight with the heavyweights. They literally cannot get capacity. And they had this moment of like, we don't control our destiny. If we take off and we go grow another 10X, like we actually can't guarantee that we can serve our customers. And so they are contemplating not for everything they're doing or even a majority of their doing, but having a subset of what they are doing under their own control, guaranteed capacity that they know they can always make available to their customers. And then, you know, have that either as insurance or as primary and use the cloud to burst. So yeah, I mean, the use cases vary. Another is energy efficiency. We've got these designs that the hyperscalers run on are vastly more energy efficient than the rack and stack approach of on-prem IT. And so you end up with some customers that are out of power. They can't deploy another rack that they wanted to of any variety because they are completely out of power.
00:21:44 · Steve Tuck, Pablo Srugo
Well, what if you could take 60 racks, these diesel engine racks you've been running for two years and consolidate them into 30 high efficiency Oxide racks and free up a whole bunch of real estate, both in power and in physical space to go deploy new capacity. So I hate to tell you it varies by customer, but it does. [00:22:04] S1: You get a sense of kind of the main thing. So just the eclipse round, when did that happen? [00:22:08] S0: We closed December 31st, 2019. [00:22:11] S1: Okay. Because what I was getting to is, I mean, when you're doing something like this, you kind of need funding. I mean, you need real funding. You can't just kind of like hack your way to something, right? So that's a huge milestone. And then I want to get a sense of if you were to think about those first, call it five years, six years until you hit what you refer to as a primary for the moment, how would you split them? Like, how would you bucket them? What were some of the main milestones, let's say, that happened in that time span? Yeah. [00:22:36] S0: I do want to mention, you know, because everyone thinks, and investors early on were like, oh, it's going to be such capital intensive business. You're going to need to raise so much money to get this thing built. And we were able to actually get the company not only off the ground and the commercial liftoff, but to profitability for $100 million. And that might sound like a lot to some. [00:22:59] S1: Today he doesn't. Today he's like, what, $100 million?