Israeli High-tech Entrepreneurs Search for Silver Lining in Cloud Computing

Benny Schnaider and Rami Tamir have their head in the clouds, or more accurately, in cloud computing. This technology uses the Internet or other networks of large groups of servers running low-cost PC technology for data-processing rather than having them stored on a company's own computer system.

It sounds arcane but, in fact, most of the cloud computing services offered by blue-chip companies such as online retailer Amazon.com, as well as RackSpace and HP, have been changing how businesses handle their computer operations.

But the process requires tremendous amounts of work on the part of the businesses themselves to adapt to the needs of the technology. The flexibility that those businesses are promised by cloud computing is frequently more limited than what is touted. Schnaider and Tamir's firm, which is called Ravello, hopes to provide that flexibility.

Apart from their concept, however, it is fair to assume that absent Schnaider and Tamir's record of success, they would not have attracted the funding they have obtained at such an early stage. This is their fourth venture together.

Ravello is developing systems that allow companies to transfer applications to and from the cloud with the click of a button. To do that Schnaider and Tamir are using knowledge they acquired in their prior business ventures, particularly Qumranet, a so-called virtualization company they sold to Red Hat in 2008 for $115 million. Virtualization technology is based on the capacity to provide a bridge between layers of hardware and software.

The pair were also partners in two other ventures, Pentacom, a data transfer technology firm, and P-Cube, which developed the means to allow Internet service providers to increase their profitability in part by improving service performance. Both of the companies were sold to Cisco Systems.

$24 billion market in 2016

According to Gartner, the American information technology research firm, sales of cloud computing service are expected to reach $9 billion this year, compared to $6 billion in 2012. Gartner is forecasting an average annual growth rate in the field of 41% through 2016, which would translate into revenues of $24 billion in 2016 compared to $3 billion in 2010. Estimates put 2012 cloud computing revenues just at Amazon, the world's largest cloud computing service provider, at $1.5 billion.

About two months ago, Ravello, which was founded in 2011, announced that it had wrapped up a financing round led by Bessemer Venture Partners that raised $26 million. Bessemer chipped in $10 million and was joined by Sequoia Capital and Norwest Venture Partners, all of them A-list U.S.-based VC funds. Schnaider and Tamir themselves also invested about $1 million dollars in initial seed money in the venture.

The large amount of capital that Ravello has attracted is an indication of major innovation in public cloud computing that Tamir and Schnaider are seeking to bring about. Currently companies wishing to move their applications to the cloud have to adapt to its technology. At Amazon, for example, customers must adapt to the Linux operating system while Microsoft requires Windows Server technology. Ravello plans to enable firms to move their applications to any technology setting.

"From a technological standpoint, what we are doing now is the next step that virtualization technologies need to make," says Tamir, Ravello's CEO. "Virtualization technology has made it possible to put operating systems into a kind of black box that can be moved from place to place. But this transfer had required adaptation to the virtualization system itself. Now we're also packaging this adaptation inside the black box."

"One of our company's engineers compared it to moving to a new home," says Schnaider, Ravello's president and chairman. "When you move, you need to pack all your things in cartons, move the cartons to the new place and open them and rearrange everything, and with every move you have to do it all over again. Our concept is that moving to and from the cloud is not a one-time event, but rather a continuum of back-and-forth steps, and we are making it possible to move the entire household as is."

"When we talk about an organization's use of the cloud, we need to understand how the whole story started," says Tamir.

"Amazon built a special service center for the volume of traffic that it had during the Christmas season, while for the rest of the year, the center went unused," he says. "At a certain point, they realized that there were a lot of other companies with similar needs. Organizations build their server centers to meet average traffic. When they have peak consumption of their resources, they turn to the cloud. The problem is that currently that transition is not a trivial matter and it's absolutely in one direction, from the company toward the outside. We want to turn it into a two-way freeway."

Tamir says cloud use will continue to grow due to economies of scale, and because his company hopes to serve a large number of clients, Ravello is planning on taking advantage of its own economies of scale.

Their approach is similar to Mobile Virtual Network Operators, cellular service providers that don't own their own transmission facilities but lease capacity from existing cellular providers. Ravello plans to lease space from cloud computing providers and then sell it to their own customers. Tamir claims they will be able to offer the service at a tenth of the current going rate.

"For a variety of reasons, use of cloud resources is not efficient," Tamir says. "This includes the fact that what the customer buys is not what he consumes." In many instances, there are periods in which customers don't use the cloud. "Our service will be priced according to actual consumption of the application in which a customer can decide how much computing power to provide him and he can turn the dial and decide how much he wants to spend."

Ravello is seeking talented new staff. "Israel has the necessary ecosystem to spawn companies like Ravello," Schnaider says. "There are engineers here who understand cloud systems in depth, and cloud providers also know the Israeli market."

For his part, however, Tamir says what Israel is lacking is a large number of people who understand online retailing and telephone sales. "In Silicon Valley, those capabilities are much more developed. This is an area in which there is still a lot of room for development in the Israeli market."