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Nebula falls victim to OpenStack market shifts

OpenStack startup Nebula's demise is the result of market consolidation and selling a product that went against the market trend.

The failure of OpenStack startup Nebula shows that even a company with an A-list of executives and millions of dollars in venture capital cannot survive the ongoing consolidation in the cloud infrastructure market.

Nebula, co-founded by former NASA Chief Technology Officer Chris Kemp, said this week it was shutting down after exhausting "all potential options." Efforts to stay alive couldn't overcome the market reality that prospective customers were not willing to bet on a startup once established vendors started providing similar products for all types of businesses.

"Now that every major vendor has adopted OpenStack, it will be very hard for startups that are attempting to compete horizontally," said Patrick Moorhead, analyst for Moor Insights & Strategy.

Behind the OpenStack market consolidation

Large vendors selling their own OpenStack distributions include Red Hat, Hewlett-Packard, IBM, Oracle and EMC. Their embrace of the open source technology used to create and manage large groups of virtual private servers in a data center is what's driving consolidation in a market 451 Research says will reach $1.7 billion by 2016.

Startups gobbled up by big players include Metacloud, Cloudscaling and Eucalyptus Systems, which were acquired by Cisco, EMC and HP, respectively.

To survive, remaining startups selling OpenStack technology will have to avoid going head-to-head with companies valued at billions of dollars. Instead, small vendors need to aim at market niches attractive to corporate IT buyers.

"OpenStack startups need to focus very intently on vertical segments like healthcare, retail or even government if they are to succeed," said Moorhead.

The 4-year-old Nebula blamed its demise on enterprises not being ready for OpenStack, saying the market "will likely take another several years to mature."

"As a venture-backed startup, we did not have the resources to wait," the company said.

Where Nebula went wrong

Nebula, however, was also partially to blame. The company sold OpenStack in a proprietary appliance when potential customers were looking to purchase software that ran on hardware already in the data center, said Dan Conde, analyst for Enterprise Strategy Group.

"They did get some traction with customers, but maybe it was the wrong approach," said Conde.

If so, then Nebula's management team demonstrated that even very smart people can be wrong. Kemp was chief technologist at NASA when the agency developed a lot of the original OpenStack code. Other tech stars who worked for Nebula during its short lifespan included Jon Mittelhauser, co-inventor of the first Web browser, and Dave Withers, a big-name Dell sales executive.

The company had raised $38.5 million from some of the most prestigious Silicon Valley venture capitalists, including Kleiner Perkins Caufield & Byers.

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