Seattle startup looks for customers in the cloud

TORONTO (Reuters.com) - What would happen if your laptop was lost, stolen or accidentally dropped in a pool? Would you be able to easily retrieve all the megabytes of precious content housed in its memory banks?

These are the questions that drove Seattle software developer Kory Gill to leave an almost 20-year career at Microsoft and start his own online data-storage company. For years, Gill has sought a Web-based storage solution that would safeguard his priceless family photos, home movies and other important digital data, but never found a single solution that addressed all his specific needs.

"If these are irreplaceable files, you need to have the same type of insurance for your data as you would of any other asset, like your home or car," said Gill, who often shared his frustrations with friend and fellow Microsoft programer Marius Nita.

So last June they founded Newline Software, with the goal of giving their customers a more flexible, cost-efficient and "green" alternative to what is currently offered by the major players like Microsoft, Google and Amazon.

There were some early stumbling blocks. Gill conceded his original pricing model, which was based on purchasing bandwidth from Amazon, was off to the point that it nearly torpedoed the whole project. But they went back to their whiteboard and crunched the numbers again and came out with a more workable model that also improved the user experience.

"It turns out that we will have a product that will actually be cheaper than some of the competition and we weren't designing it to compete on price," said Gill. Power is the biggest cost driver for data storage companies, so Gill and Nita designed software that tracks how often people access each individual file, or bit of data, and stores their seldom-used documents in a way that requires less power to maintain, which translates to reduced pricing for the customer.

"Why would I spend top dollar to keep it online all the time since I'm not even looking at it?" asked Nita, who said big companies like Google and Microsoft just offer a flat storage fee and because of their size can't accommodate a tiered pricing format. "When you have a large database you need access to the entire thing all the time, so they don't take a portion of that data and keep it somewhere else like we will."

Gill added that most data storage providers are in such a hurry to grow their customer base into the millions that they end up with these fixed-price-for-unlimited-storage plans that run counter to what most people actually need. Because of this a "significant" number of customers are overpaying and Gill believes these customers can be convinced to switch to his product.

"These companies are steamrolling over some of the opportunities that we see in this space to provide a high quality, reliable service."

THE PITCH

Gill hopes to pioneer the term "eco-digital preservation," which he said refers to a way of storing data that is both environmentally friendly in that it uses less power, and more economical for customers. Newline Exact is the trademarked software Gill and Nita plan to debut in the upcoming weeks on their website 0xDA.com - the coder term for a hard return, or "new line" on your computer keyboard.

According to Nielsen Online's 2008 statistics, 220 million Americans were online, which represented about 72 percent of the overall population. With the Obama administration pledging $7.2 billion toward expanding broadband access throughout the U.S., Gill said he anticipates there will be a growing need for data backup. Gill has based his business model on being able to average 100 customers a day and has built in the potential for scaling to a million.

In order to provide for that kind of infrastructure, the Newline secured an initial Series A funding round from friends and family, which Gill described as "comfortably" over the minimum amount of $250,000, but under the $1 million maximum.

"So now that we have the business funded, I think one of the next hurdles we'll have is just how do we reach our target markets? How do we get customers to know about our product and how do we basically market it and get people to try it, to sign up, to use it and to pay for it?"

TAKING IT TO THE EXPERTS

Steve Duplessie, an experienced entrepreneur and leading expert on the cloud computing and storage industry, is all for the underdog, but said they need to have a superior technology that gives them an edge in the fight. Duplessie said the cloud computing market is at the beginning of what he called the "hype cycle" and there are thousands of players, but it will ultimately be dominated by a handful of gigantic companies who have the "economic muscle" to weather the ups and downs.

"Unless they (Newline) have an application advantage or some sort of what-they-do-to-stuff technological advantage, it's going to be very difficult to compete in a commodity offering," said Duplessie, the founder and senior analyst at Enterprise Strategy Group. Duplessie added that the manufacturers of computing infrastructures, such as disk drives or microprocessors, will always have an advantage over those companies that merely package services on top of it.

"Unless you build the disk drives, you're going to pay for them and another guy is always going to pay for them cheaper than you. This is a game that plays at scale. To get to whatever degree that they could, the only way it becomes sustainable is if they either have or are going to develop higher-value services. I cannot envision a model that is ultimately sustainable that is predicated exclusively on whatever the lowest commodity common denominator is, like capacity."

Duplessie said he would have to know more specifics about how Newline's trademark software differentiates itself from the pack before he could see how they could compete with the giants in the areas of pricing, storage security or operating efficiency.

"Everybody's play that offers this service is to create operating efficiencies to have the lowest cost for delivering that particular service."

Joslyn Faust, an analyst at Gartner who specializes in marketing strategies for small and medium-sized businesses, said startups like Newline need to target which potential customers are most likely to buy their product or service in the least amount of time.

"If you are spending money and effort trying to market to everybody then by default a lot of the people in your pipeline are going to be people who will never buy from you, because they have no need," said Faust, who added this is a challenge that affects most information technology startups, who believe they have a unique product but don't know how to make a name for themselves. "So once they have figured out who is that specific set of customers that I should be spending my time on, then they can figure out what the best way to reach them is."

Faust said companies reach their customer base in different ways: through word of mouth or by showcasing their product at conferences, while others achieve it through more personal relationship building and reaching out via social media sites like Twitter and Facebook. Search-engine optimization is also a key ingredient, as Faust said most consumers and businesses find IT products and services through Google, Yahoo or Microsoft. Faust said the fact that Gill and Nita set out to target their software around people with similar needs like themselves is a good way to build a base.

"People want things that are customized to their needs whatever they are," said Faust, who added that Gill and Nita need to discern exactly what makes them special in their field. "They should have an idea in their head of what their differentiator is and who is going to value that difference."

Joshua Baer knows first hand the challenges of starting a cloud-based company, having successfully launched two web-based email startups in Skylist and OtherInbox, and said the key is to form a distribution partnership with a significant player so that your product gets noticed. With OtherInbox, Baer was able to strike a deal with Yahoo to get some prominent placement where his promotional icon could be viewed by millions of potential clients.

"The whole value of the partnership is that they have the door already open and you're just walking through it," said Baer, who conceded he is skeptical of Newline's ability to get 100 signups a day, something OtherInbox only achieved after partnering with Yahoo. "One way or another they're going to have a customer-acquisition cost and it's probably going to be on the order of $10-50 per person. So if they want 100 customers a day that means they're going to be spending $1,000-5,000 a day to make that happen."

However Baer is not yet sold on Newline, he remains bullish about the cloud and the opportunity for startups to flourish, as long as they are willing to be flexible and cater their businesses to the changing needs of consumers. Baer said one of the most important attributes for any entrepreneur to possess is an ability to realize when they're wrong and change their business model.

"Whatever you think it's going to be, is probably not exactly what it's going to be. The initial idea gives you a great start, but it's rarely a moment of pure genius where you write down the secret formula and that's it."