Two Views on Infrastructure

In the past year or so, we’ve seen significant excitement regarding infrastructure software or technical businesses building beneath the application layer. The stock charts of Datadog ($DDOG) and others, along with impending public offerings (Snowflake), demonstrate investor appetite for this category across late-stage growth and public markets. From my seat in the private markets, the pre-seed and seed rounds of dev tools and infrastructure companies are quite competitive, with demand fueled by a long-term belief in “digital transformation” and runway in the global IT market.

As interest continues to percolate, I find that many people, investors and operators alike, view the category as monolithic (no pun intended). The market rules governing the growth of infrastructure software is the same for all startups, and it seems to be inevitable that secular tailwinds will push all these companies to unicorn status, following a deterministic path. We’ve over-rotated on generalizing specifics and nuanced tactics into abstract concepts about infrastructure software broadly. I touched a bit on this in my piece on open source software.

There are two different ideas about the future of infrastructure software, which I gathered from personal investing, conversations with investors & operators, and observations from the field (or Zoom). One is friendly to the early-stage startup ecosystem, and the other could be perceived as quite unbecoming.

The Big Get Bigger

The growth of the public cloud providers — AWS, Azure, GCP — over the past decade is no joke. Combine their existing scale with increasingly common investor tropes about technology & information markets (reflexivity, lock-in, increasing returns), and these properties will have impenetrable moats around them.

Often, the rebuttal to a startup pitch that goes as, “What if Google / Amazon / Other BigCo does this?” is usually not a good one. Despite their sophistication, they can’t move fast enough to compete with nimbler startups. Yet, in the case of infrastructure software, AWS / Azure / GCP can literally *see* code being run and new products gaining traction. Their lens into the future is crystal clear, and over time, they will subsume new startups in the market. The new infrastructure player of today is a ticket on the public cloud roadmap of tomorrow.

A Less Sober Portrait

The idea sketched above is not friendly to the believer in the tendencies of entrepreneurial energy. The alternative view is that the public clouds have a utility-like nature — they have tremendous scale, the ability to print cash with a recurring revenue stream, but their margins & growth are ultimately capped. They may even look like the bare metal companies of a different generation — HP, Dell, Cisco, etc., acting as substrates for compute, storage, and networking on commodity hardware.

The opportunity lies in the rich ecosystem of applications and data that developers or operators interact with to provision and manage software, which can run anywhere. And there are many wonderful ideas for this future. Lightning-quick databases for all types of data structures that actually scale. Microservices that don’t break or get tangled, which then paves the way for a progressively modular stack. Access controls and security policies represented as code. Portable development environments that transcend one person’s laptop. An observability platform that finally ties together the three pillars.

As an early-stage venture investor and optimist, I lean towards the latter view, but wrote this piece to recognize and shine light on the nuance.

I recently came across a piece from Matt Klein, the creator of Envoy (a popular open source project), where he notes:

“Providing a full PaaS is synonymous with competing directly with the major cloud providers who are attempting to commoditize “plumbing” like Envoy as quickly as possible. Without providing a full PaaS, ultimately the business boils down to providing services and support (packaging, tooling, observability, etc.) around all of the existing PaaS solutions. Either way, it’s a tough road.”

Matt could have snapped his fingers, raised a series A, and been off to the races with a startup building around Envoy. Nevertheless, he acknowledged the structural disadvantages that would have resulted with the decision. I applaud that decision, and hope more of that style of thinking comes into the ecosystem as the market continues to mature.