During our interview trip in Spain, we interviewed Diego Cabezudo – CEO and co-founder of Gigas, a start-up based in Madrid. Gigas is an innovative cloud hosting provider with a leading position in Spanish speaking countries.
Diego as a spirited entrepreneur shared his insights about the business model of Gigas, the market development of cloud hosting, and his advice to first time entrepreneurs.
Interviewer: Hi. Today we are in Madrid with Gigas. Diego, who are you and what do you do?
Diego: Hi. I am one of the co-founders of Gigas. We started in 2011. Just to start with a bit of background for myself and the team as well, we were five founders that started the company and all of us came from telecom and internet. So our background is of both big multinationals and startups. I am the only one that did not go through Ya.com, but the rest of the team comes from Ya.com, which was at the time the largest portal in Spanish speaking world, and also the second largest ISP in Spain. It was started in 1999 and it was extremely successful, and less than two years later was sold to Deutsche Telekom, so it was one of the big successes, if not the largest, in the internet in Spain. So our president was the CEO there that led the sales, and our CTO was the CTO, and actually all the technical guys, the system administrators come from there, which is a great background because obviously they were managing like five hundred servers, huge amount of traffic, high availability, and that’s really what you want out of a hosting company.
Myself I’m mostly telecom. I was in TeleCable, which was one of the first cable ISPs here in Spain, and a very successful one. I was actually the first employee of the company, because it was a company set up by the electrical company so they put three of their guys and then hired a young trainee, and that was me, so that was a great experience. And then I’ve been also in other telecom companies like O2 where I was the head of strategy, or business and technology, so quite interesting as well. And then also in smaller companies and startups like Fon, the Wi-Fi company. And my last role was the CEO of an IT managed services company. That was a Spanish company and I expanded it into the State and Brazil, Mexico, Latin America, quite successfully. So quite similar to what I am doing now.
And also I think the background in telecom is quite important because historically hosting has come from more like the computer guys, and I think telecoms and software have different views of the world. Telecoms really understand what five nines are in terms of high availability and things like that, whereas in the software industry if something goes wrong you just switch the machine and it gets solved. So I think that’s very good as well.
Basically what we do is what is called cloud hosting or infrastructure as a service, which is basically the technical jargon for renting servers in the cloud. So instead of buying your equipment, you just go to our website or through one of our sales channels and get a certain amount of computer resources and storage, etc., and you set up your servers and your infrastructure. So obviously there has been a change of paradigm in terms of providing IT services. I remember only a few years ago – I’m talking of four or five years ago – you had to buy hardware and always oversize just in case for the peaks. It’s quite interesting, the sector has evolved so much. Now, for example, we’ve just launched a really good feature that we call tele-transportation, and it’s actually quite unique in the world, no other provider has it yet, and we can move a virtual machine from machine to Madrid to Miami, where we have two data centers, we can move the machine without rebooting the machine, without changing the IP address. So it’s really cool, like you have one machine serving traffic in Madrid, and two seconds later you have it serving traffic in Miami, so it’s like tele-transportation.
Interviewer: This is also beneficial for the client because the loading speed of the website improves.
Diego: Exactly. What we’ve done so far is always listen to our customers and see what they really needed. So obviously we can’t compete with the large multinationals and the large hosters that have tons of engineers developing new products every day, but we really focus on things that our customers demand. So we have some of our large customers who have a lot of traffic on both sides of the Atlantic, what do they do to be closer to their end-customer, to replicate their infrastructure? So they have, imagine, ten servers here in Spain serving traffic and another ten in America. During the European day the one in Europe are really busy and the ones in America are doing nothing, then at night time it’s the opposite.
These we developed with two uses in mind. First of all for contingency, for business continuity, so if something happens here you can move your infrastructure there. But also for a feature that we follow ‘follow the sun’, so in this scenario that I was telling you, replicating infrastructure, that type of customer what they have now is ten servers in Spain and in one or two in America during the day, so you have these ones that are really busy and then a couple there for the night owls that are looking at the websites in the middle of the night. And then when the sun starts coming down and the traffic patterns start to change then you start moving machines. So suddenly instead of ten plus two, you have a nine plus three, or eight plus four. And then 24 hours later you reverse the situation, and you do that twice a day. Basically what you get at the end of the day is that you save almost 50% of your costs.
Interviewer: I understood that you were trying to develop some software in order to utilize your service much better and more efficiently, and thereby increasing your margins or lowering your prices for the customers. What is the major difference between your product offering and the product offering of another company?
Diego: I think there are two questions there, one about the software and then the infrastructure. But starting with the second one in terms of our competitive advantage or difference with other providers, one of the most important things, or the key has been our customer support and our local element, what I call being a local company. We are trying to be a global company, and actually we have offices already in five countries and we’re opening a sixth this month, but by being local. And this is quite important, because I remember when I started the company and we started looking for funding, some investors said to me, “You are absolutely crazy. Don’t go into this game, this is for the big ones and you have nothing to do.” And I always defended that there is a very strong local element to this type of service, and I think time has proved us right. 3,000 customers later, with a growth in revenues and being the leader in the cloud hosting space in Spain has proved that we were right, because at the end of the day the type of services that we offer are absolutely critical for our customers. It’s not like four years ago or ten years ago that you’d put a website the same as you would leave a brochure somewhere, and if it was down a couple of days, doesn’t matter. And now some of our customers it’s their whole life, all their business is online. So obviously they can’t be down, not even one second for some of them.
So the fact that you have a local company that you can talk on the phone with someone in Spanish, which is quite important, other services support is in English and by e-mail, and both are big barriers for Spanish speaking countries. One, because we are terrible at languages, unfortunately, so people want to talk in Spanish and want to be able to communicate in Spanish. And also we like to talk. People don’t like sending e-mails and waiting for a reply. To be honest, for a service that is mission critical, it’s not acceptable.
So we started with a really good customer service, obviously with local telephone support in all the countries where we are, in Spanish, in English as well, we have bilingual staff, but the important part is Spanish. And it is also run by engineers, so we only have engineers and system administrators. So our first level of support is equivalent to a second or even third level of another provider or telecom or things like that. So that has been for us the best marketing, the best customer appreciation too. And actually till today more than 35% of new customers every month come referred by existing customers.
Interviewer: I understood that customer service is quite an important point for getting competitive advantage, is there anything special about your product that is different from bluehost or other hosting or other hosting providers that generates, from your perspective, competitive advantage?
Diego: Obviously customer service is really important, but you need to have a good product, because at the end it’s the most important thing. So we’ve always done two thing, focus on the quality of the product, so we’re not the cheapest in the market, but we offer very good quality services and people realize and talk about it. But also we’ve taken a different approach in many areas, and I think that has actually worked quite well. As I was saying, we launched with what we thought was the very minimum and have been growing our customers. So just to give you some examples of things that we do differently, I think there are two main differences especially with the large multinationals. One is the philosophical approach that we’ve taken, and that’s getting a competitive advantage from a usability point of view, customer experience. In the beginning when we set up the company, our target were the small and mid sized companies. We thought that the big companies were already sorted, they had their technology needs sorted, so we wanted to offer this type of technology and benefits to the smaller companies. Therefore, we spent a lot of time and effort in the control panel, the user interface, the usability, the customer experience. And then to our surprise we started receiving calls from very large companies that they were interested in this service. And it has happened that that which we designed for non-techies actually the techies are now loving it. So we try to make things extremely easy from a user point of view, from a usability and user experience, and also from a cost experience.
Interviewer: The good thing about that is that even though you have invested a lot of money into the good customer service, you still, I would assume, get less calls because people don’t have problems, or at least they can solve them by themselves.
Diego: Exactly. And there is no learning curve. Normally in this type of business when you acquire a customer you have very intensive 30 days or more, four to six week period where you have a lot of interaction. With us it doesn’t really happen like that, because people can do everything, it’s very intuitive. So we didn’t plan it that way, but it has become a competitive advantage.
Interviewer: Let’s talk briefly about the market development in the Spanish speaking world in terms of the whole cloud hosting. Can you tell us for example about the market segment how they develop in terms of sales, gross rates, profitability, and what would be your guess for the future?
Diego: The hosting market in general in the Spanish speaking markets is much less developed than for example the UK market, which is the largest market in Europe, or Germany that is the second largest. And this is quite similar both in Spain and in Latin America. Historically people have had their own infrastructure in-house, it’s what we normally call hosting in the closet, because it is normally like a small closet that you have in the office and you have your machines there. So it hasn’t had as much development as in other countries or obviously the States, which is the largest market in the world for these types of services.
And then the market is extremely fragmented. For example, here in Spain there are about 2,000 hosting companies. The market would be around €600 million per year, and the largest one has revenue of €40 million. So that gives you an idea. There are couple of companies that are larger with €30 or €40 million, and then all the rest are below €10 million. So it is an extremely fragmented market. In South America it’s even more fragmented. It is a very fragmented market with traditional hosting companies, so they’ve been, first, very focused on share hosting, which is how they started, so you buy a physical machine and you try to squeeze in a few thousand customers. Then they moved to dedicated hosting, you have your own physical machine. That was what gave the growth in Spain for the last two to three years. And when we started in the market we were almost the first to offer cloud hosting services as a local provider. For the rest it was it was difficult to follow us, because the large ones were worried cannibalizing their own dedicated server base, and they small ones couldn’t really afford to invest in infrastructure, because the cloud infrastructure is quite different from the dedicated servers or the shadow hosting, and then you need all the platform and stuff that requires a lot of development effort. So in that sense we launched and we were quite successful. What we see is that a lot of the dedicated servers are decreasing, and that space is being taken by virtual private servers, VPS, on the low side, and then on the medium market and the corporates for what we call cloud services.
In terms of the market, just to give some size, I talked about the size in the Spanish market as a whole hosting being 600 million, the part of cloud hosting we estimate to be like 120 million. There very limited information about the size of the market, especially in Spain and Latin America, but the analysts, even the most conservative ones, estimate that in the regions we operate, let’s say the Spanish speaking market, Spain and Spanish Latin America, it would be $350 million or $400 million at the moment and growing in the next three years, so in 2016 with $1.2 billion. So the growth rates are phenomenal. We are seeing it in the market. In Spain we estimate that it’s grown about 40% in the couple of years. In Latin America over 50% in most of the markets we’re in. And our experience, we’re growing in terms of revenues double digit every month, month after month. So it’s a very very healthy growth.
Interviewer: We always try to tell our readers about some unique experiences from entrepreneurs, and as we are here today in Madrid would you like to tell about the impact that the financial crisis had on you as a startup, and maybe generally on the ecosystem in Spain?
Diego: Starting from our own experience, we didn’t set out the company because there was a crisis or we didn’t think about not setting it up because there was a crisis. We saw a business opportunity from the other side, we were very good customers of large hosters, we couldn’t get cloud hosting services in Spain, and we couldn’t get it in Spanish, so we thought there was a gap in the market and we decided to go for it. And this was the worst time of the crisis, when we were looking for funding it was the Spring of 2011 when Spain was at the verge of being intervened. So it was very difficult. We actually talked to investors abroad and they were saying, “Are you crazy, we are not putting any money in Spain.” And I remember one actually that said, “If you were in Germany I would invest.” And I said, okay, whatever. And probably if we were in Germany it wouldn’t work, because there are strong players there. But the market opportunity is here. It was challenging in that respect, getting the funding. Because we were very capital intensive we have to invest a lot in infrastructure, in customer service 24/7, etc., we needed quite a bit of money from Spanish standards. So it was a challenge.
But then it has helped us a lot, because together with the crisis we had the worst credit crunch in Spanish history. As I said, historically companies like to buy their equipment and have it there in front of them and see the lights, and suddenly they went to direct HP, oh no, I can’t finance you. Vendor finance was gone. They went to their server retailers I need to rent it. Oh no, we can’t give it to you, unless you put the money here, a deposit. Well then I will buy it if I have the money in cash. So people suddenly couldn’t buy machines, or they couldn’t finance them, and a lot of the companies didn’t have the cash to invest. So some customers came to us almost like a financing alternative, and I remember for example a customer saying to us, “Diego, what I would really like is to buy the equipment and have it at home, but I can’t, so I will get it from you guys.” And then they started seeing the technical advantages. And now they’re getting more and more excited, and they say this is great because I have the advantages of having it in the house because I have full control over the control panel with the advantages of you guys taking care of all the infrastructure.
For the ecosystem, I think it has been quite good. Obviously it’s a drama, unemployment rates here are absolutely incredible, especially with the young people. But one of the good things has been that people are certain to change their mentality. And Spain historically we’ve been a country of entrepreneurs, we travel the world discovering places and stuff, we’ve always been very venturous in that sense, and if I look back for somebody even in my own company, in my own family a generation back, every single person had their own business, be it a small coffee shop or architecture office, or whatever it was, but they were working for themselves. Whereas in the last 40, 50 years, it was quite the opposite. The best thing that could happen to you would be to work in a large company in Spain or for the government for your whole life. Work forty years and stuff. So that was the mentality until only three years ago. And I think with the crisis people started seeing that first of all those jobs are not as safe as they thought, unfortunately every single large company in Spain let people go, so they realized this is not a job for life. And people – some because of conviction and some, unfortunately, because of the situation they had – started their own thing and their companies, so there has been a move in terms of entrepreneurship.
And also the cloud hosting industry historically has been very very small, and in the last three the money available has more than tripled. There are new funds, larger funds, there’s a lot more money available for entrepreneurs, so that’s a good thing. And I think what we need now to close the circle is to have a good few exits that could encourage entrepreneurs to start their companies and also investors to put their money. And then you close the circle and things start working.
Interviewer: Diego, thank you very much.
Diego: It’s been a pleasure. Thank you for inviting myself and Gigas to talk to you.
Interviewer: Yeah, and if you’re looking for a nice cloud hosting company, check out Gigas. Thanks.
Diego: Thank you.