Back in the days of the dotcom boom towards the turn of the century, an internet entrepreneur had to spend hundreds of thousands of pounds buying computer servers, set them up, launch the service and then pray that he had guessed correctly on what the uptake would be.

If the site attracted too many visitors, the servers would simply collapse under the weight of traffic. If there were too few visitors, the company was left with a roomful of expensive, under-used equipment.

“I remember playing all those guessing games. I spent weeks trying to negotiate different kinds of deals with internet hosting companies: could we have two servers for the first two months, then six for the next two, not really being sure what we would need,” says Lachlan Donald, a veteran technologist who is now chief technology officer of 99designs, a internet marketplace for graphic designers.

If a company got its calculations wrong, it could take days or weeks to get more computer power.

“At previous companies it was a nightmare. Even to get a new web server set up would take a couple of weeks,” says Jags Raghavan, vice-president of business development at 8KMiles, an internet consulting company. “Now you can do it at a touch of a button.”

The difference is the arrival of cloud computing services, which allow companies to rent computing power by the hour and by the megabyte, making it vastly easier to launch an online business. Start-up costs are much lower.

“Companies had to borrow a lot of money to buy all those servers. It created a barrier to entry that cloud computing has removed,” says Mr Donald. When he helped to launch 99designs, using Amazon Web Services to run the website, the company was set up without any external funding at all.

“Amazon Web Services has been the biggest boon to venture capital-backed companies in recent years. It has meant you can now fund 10 companies for the price of one, and you are seeing new applications being developed that would have been difficult to build cost-effectively in the early days,” says Michael Grant, chief executive of Cloudscaling, a company that offers cloud infrastructure software.

These services also help to keep down staff costs. “If you are a fashion company, your business is not information technology. Now, you don’t have to set up an IT division that is not part of the core business. You can run with minimal IT staff,” says Mr Raghavan.

Having computing power on tap like electricity or water has also helped fledgling companies to deal with sudden jumps in popularity. Zynga, a developer of games for social networks, for example, turned to Amazon Web Services in 2009 when users of its FarmVille game jumped from zero to 10m in six weeks and the company had run out of its own data centre capacity.

“If you are launching an app and you aren’t sure how many people will be hitting the site, it makes sense. Even if it is 1m users you will have the flexibility to handle that,” Mr Raghavan said.

Mr Grant says that having unlimited amounts of computing power on tap has also helped to spawn new types of companies that would not have been viable before, such as biogenomics businesses offering specialised analysis of gene sequences.

“If you are three guys in a garage and you need 10,000 servers because you are doing some super-fancy algorithmic calculations, the cloud is fantastic for that,” he says.

Cloud computing can work for larger companies as well as small ones. A number of Fortune 500 companies use cloud computing for some of their operations, often where they have want to experiment with new types of services, or create a website around a new product, without huge IT investment.

However, computing experts warn that after a certain point, cloud services can prove very expensive, and it might make sense for companies to move to running their own servers. After growing from six staff to 70 in four years, 8KMiles is still on the cloud, but other companies are moving on. Zynga, for example, recently moved a large portion of its games from Amazon to its own computers.

Cloudscaling is exploiting this trend and has a growing business helping companies who have outgrown the start-up phase transition away from public cloud services like Amazon to running their own private networks.

The cloud might also not work for companies that are too small. It can be complicated designing software to run well on the cloud, warns Mr Donald, and this is something that very small businesses could struggle with.

“It is much more technically complex. You need to automate everything and assume everything is going to fail. Although a whole ecosystem of software services companies has sprung up to help with this, it is still has more complications,” he said.

Mr Raghavan agrees. “The cloud is not for everyone. If you have a solid business case I would recommend it. But if you just have a concept and don’t really know what your audience is, I would not recommend it, because the cloud is not free,” he says. “It reduces your capital expenditure costs, but it is not free.”

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