How to bet on the bubble?

(Note: this is merely the ramblings of a startup founder and should not be treated investment advice of any kind whatsoever. Caveat lector.)

Apparently, we're in another tech bubble. I was wondering the other day how Color Labs were going to spend the $41 million they recently raised, and the only things I could think of were marketing and website hosting -- the former because the free press they got out of that ludicrous investment will die down, the latter because it sounds like they've built the app with a client-server model, so they'll need lots of storage and bandwidth to manage it.

As I write this, Color.com has the IP address 50.17.223.168, which ARIN tells us is in the Amazon EC2 subnet. So I guess we know where a chunk of that $41m is going.

So, one startup is using Amazon. At work, we're using it for our programmable cloud spreadsheet, Dirigible, too. But are all the cool kids using it?

The best way I could think of to check that out was to work out what Y Combinator-funded companies are using. They don't publish a list of their portfolio companies anywhere I can see, but there's an unofficial list here. So, taking the companies started since January 2010, 80 in total, I made this sheet to work out where they were all hosted.

Highlights:

• About 26% of the companies founded in January 2010 use AWS.
• About 63% of the companies founded in June 2010 use AWS.
• About 71% of the companies founded in January 2011 use AWS.

There's a pretty obvious trend there, but it's not clear what it means. Perhaps the startups kick off using AWS, then switch to other hosting providers once they've got traction. Perhaps many of the startups from January 2010 are now bust, and the hosting provider shown is the one for the holding page that now sits on their domain. Or perhaps it's something else entirely; I guess the best way to track would be to revisit the sheet periodically and look for changes.

However, one thing is very clear -- new YC startups right now are overwhelmingly choosing AWS. Back in the days of the last dot-com bubble, people often said that it was best to invest in suppliers to startups rather than the startups themselves -- better, in a gold rush, to sell shovels to gold miners than to start prospecting oneself. Back then, that would have meant buying Sun Microsystems stock, which, hard though it might be to believe these days, would have been a great investment -- inasmuch as any investment could be in a bubble. Certainly better than investing in a single startup, because even back then, most failed. (Obviously once you have money to spread your bets across a range of startups, things change. But I don't, and nor do most other people.)

So, is now a good time to buy Amazon stock? Well, if I could invest in AWS alone I would. But as far as I can make out from Amazon's last SEC 10-K filing, a maximum of 3% of their revenues came from AWS in 2010 (AWS comes under "other" sales, which totalled $953m, and total sales were $34bn) . It's hard to unpick what the associated costs where, as unfortunately they don't seem to split it out from their general technology spend. But their gross profit ($7bn) is seven times the best-case AWS revenues, so it doesn't sound like it's a major component.

So, ultimately, investing in Amazon is probably more a bet on their other businesses. They're pretty good at commoditising their complements, so may be a good pick. But they're not a bet on startup growth.

On the other hand, they're clearly blowing away the competition, at least as far as the sample set of companies are concerned. So investing in other cloud hosting providers like Rackspace sounds like a really bad way to bet on the bubble. And at least that's one useful (if tentative) conclusion.