Investing in cloud companies

Investing in cloud
Investing in cloud

As the economy continues to improve generally, opportunities are improving for investment, lending, trade sale and listings for tech and cloud businesses. Not everyone can command Facebook or WhatsApp valuations of course. With traditional bricks and mortar businesses, it is easy for investors or financial institutions to identify the assets as they’re normally tangible – the premises, the people, the equipment. With cloud many of the assets will tangible too. For example, a data centre provider will have a building and lots of expensive IT equipment.

With a cloud broker, reseller or aggregator it’s different. They might not actually own all or any of the services and may simply be reselling third party services to customers. I recently advised a financial institution on its loan to a cloud aggregator and those were the issues in this instance. I was asked to undertake contractual diligence as it was even more important than usual to review the aggregator’s contracts with suppliers and customers. Public cloud is normally sold with all risk passed to the customer and SMEs will not be able to change the terms to reduce their risk. This means the broker / reseller / aggregator will buy public cloud resource on standard terms and may carry all the risk. If their customers are able to dictate terms of business and to get the broker / reseller / aggregator to carry the risk, this could put the loan at risk. If anything goes wrong, the customer could sue the aggregator who won’t be able to pass on that liability to the supplier who caused the problem. This failure to “back-to-back” the terms leaves the broker / reseller / aggregator carrying all the risk and this could mean the financial institution will not get back its money.

I reviewed the contracts to ensure they had back-to-backed their risk to the customer and it all worked out ok. In fact their contracts were reasonably good on that front. As cloud adoption continues to grow, cloud providers will grow and will consolidate. Inevitably though, some cloud businesses will fail.  I anticipate cloud diligence will grow in importance. If in doubt contact your cloud lawyer!

 

Image courtesy of renjith krishnan “Business Growth” / FreeDigitalPhotos.net

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