The Rise of Neocloud Providers

A CVC Perspective on Innovation and Opportunity

The evolution of cloud computing has ushered in a new era defined by the rise of Neocloud providers¹, a class of AI-first cloud service companies that challenge the dominance of traditional hyperscalers like AWS, Microsoft, Google, and Oracle. Born out of technological revolutions and economic necessity, many of these Neocloud providers trace their roots back to the crypto mining boom, which equipped them with vast fleets of GPUs optimized for high-throughput computing. As the crypto market matured, these resources found a natural next step: serving the burgeoning demand for AI workloads.

Neocloud vs. Hyperscalers

While hyperscalers have built their businesses on offering broad, horizontally scaled services, Neocloud providers differentiate themselves by addressing niche AI workloads and vertical markets. These providers cater to enterprises looking to manage their capital expenditure risks, enabling them to scale AI initiatives without investing heavily in their own hardware. Neocloud companies specialize in deploying optimized infrastructures that include not just GPU fleets but also network accelerators and high-speed storage—essentials for managing the massive data and compute demands of training and inference tasks.

Another distinguishing factor is focus: Neocloud providers often target specific stages of the AI lifecycle. Some focus on training large foundational models, while others concentrate on inference. This specialization allows them to align closely with customer needs, prioritizing workloads over simply deploying the latest Nvidia chipset.

Serving Sensitive Industries

The appeal of Neocloud providers extends beyond their technical capabilities. For industries like healthcare, finance, and government—where trust, privacy, and regulation are paramount—these providers can offer tailored solutions, often in geographies or environments that traditional hyperscalers struggle to penetrate. For example, Neocloud providers can enable on-premise-like security while offering the scalability of the cloud, bridging an essential gap for heavily regulated enterprises.

Challenges in the Neocloud Space

However, as noted in a recent Pitchbook report², the path forward is not without challenges.

1. Climate and Carbon Emissions:
   The high energy demands of AI workloads make sustainability a pressing concern. Enterprises seeking long-term partnerships will look for Neocloud providers that prioritize renewable energy sources and transparent carbon accounting.

2. Power Availability:
   Many Neocloud providers are vying for access to affordable, stable power. Those that can secure consistent energy supply—and, better yet, incorporate renewable sources—will stand out as long-term winners in this competitive landscape. This dynamic could make partnerships with utility companies and governments a critical part of the strategy.

3. Hardware Availability and Depreciation:
   The reliance on cutting-edge hardware presents risks related to supply chain volatility and rapid depreciation of equipment. While Nvidia remains the dominant player in GPUs, the increasing interest in custom silicon and alternatives like Cerebras Systems' AI chips highlights the need for diversification and strategic planning.

The Role of Liquidity: IPOs and M&A Activity

The upcoming IPOs of Coreweave and Cerebras Systems are likely to inject fresh liquidity into the market, driving deal-making and consolidation. These events could also signal to investors and enterprises that the Neocloud sector is reaching a level of maturity, spurring further innovation and partnerships. As Neocloud providers grow, they will have the resources to differentiate themselves not just through better hardware but also by addressing power challenges and sustainability concerns.

A Rapidly Growing Market

The market potential for Neocloud providers is staggering. According to a recent Pitchbook report (cited earlier), the cloud service provider space is projected to see a 97.5% compound annual growth rate (CAGR) between 2024 and 2025. For innovation leaders in large enterprises or CVC professionals, this growth underscores the opportunity to shape the ecosystem through strategic investments, partnerships, and co-development initiatives. By aligning with Neocloud providers, enterprises can accelerate AI adoption while sharing in the upside of a rapidly expanding market.

Final Thoughts

The rise of Neocloud providers represents not just a shift in cloud computing but a chance for enterprises to rethink their approach to AI. By addressing key challenges like power availability, sustainability, and industry-specific needs, these providers are poised to disrupt traditional paradigms. For those in roles driving innovation at large enterprises, the message is clear: understanding and partnering with Neocloud providers could be the key to unlocking AI's full potential. The next wave of AI innovation may well depend on it.

Corporate venture programs should consider exploring how their organization’s innovation and AI strategy could rely (either explicitly or indirectly) on this sector and whether targeted investments could improve both relationships and the economics.

1. For more background on Neocloud providers, check out https://semianalysis.com/2024/10/03/ai-neocloud-playbook-and-anatomy/. It is likely that Semianalysis coined this term.

2. Check out this great article on Pitchbook, which contains a lot of great data on this new industry. https://my.pitchbook.com/research-center/report/2ae63d04-37ff-3cbf-a51b-6fd1410b871f