The Cloud and the Changing Role of the Investor
As the growth of cloud computing creates more entrepreneurial and business opportunities, new investing trends are taking shape in the tech arena.
April 30 , 2012
Tech entrepreneurs can see clearly now; the rain is gone, thanks to the cloud. Cloud computing is making it easier and more affordable for people all over the world to be entrepreneurs, and individuals and businesses are acting accordingly.
According to Forester Research, the cloud computing market is expected to grow to $241 billion in 2020. And, an IDC white paper shows the cloud computing industry is expected to generate 14 million jobs in the next three years. With the sizeable growth in cloud-based entrepreneurship taking shape, new opportunities for investors are surfacing, and cloud investments are increasingly funding new business strategies.
Startups that leverage cloud computing frequently are able to bootstrap or take a small amount of angel capital to do an alpha or beta release of their product, and gain some initial proof points with customers and users. As a result, the risk for many firms providing initial institutional financing is mitigated. And as most of Silicon Valley knows, for investors it all comes down to minimal risk.
Kenneth Oestreich, Sr. Director of Cloud & Virtualization Marketing at EMC, says the use of cloud infrastructure generally means less up-front capital investment on infrastructure. "The cost is shifted to operating expenses," said Oestreich. "But the use of cloud also means that if, or when, a company's business grows, its infrastructure can grow with it… even overnight."
Rackspace Cloud Program Manager, Adam Hansen, equates cloud solutions to paying a water bill. "Roughly, every 30 days you get a bill for what you've used," he shared. "Cloud hosting for the most part works much the same way. If you choose to host in house still, there is the flexibility of it. I can add servers in a few minutes rather than days."
Because of the low burn-rate of cloud-based companies, there is a gap in the market between the traditional angel round of investment and the series A investment from a large VC firm. The Micro VC Illuminate Ventures bridges that gap.
"What we like about cloud computing goes beyond saving money," said Illuminate Ventures founding Managing Director Cindy Padnos. "We love the recurring revenue models that enhance predictability, but also hold companies accountable for customer satisfaction. We really like the ease of integration, the ability to deliver new functionality rapidly and seamlessly to all users, the anywhere, anytime access, as well many other innovations that cloud computing enables."
Oestreich points out that larger VC firms investing in the cloud have their own angle—"be it infrastructure or how the infrastructure is applied to support a cloud. In February, Bloomberg reported that the Bay Area venture capital firm, Kleiner Perkins Caufield & Bayers, is looking into starting a new fund for startups that sell cloud services to larger companies. This is just one example of a trend that's picking up speed.
The Seattle-based VC, Ignition Partners, examines the way businesses of all sizes use cloud computing to provide software or platforms as a service. The firm's managing partner, Frank Artale, says the "hybrid cloud" is a significant investment priority for Ignition.
"The hybrid cloud is a set of software and other technologies that enable a central IT department to deliver both private and pubic cloud services to their business units in a governed and compliant way," explained Artale. "We're seeing that particular sector growing rapidly. Most businesses will deploy a hybrid cloud that will enable the use of both private and public cloud services."
ServiceMesh, one of Ignition Partners' companies, provides "everything-as-a-service" through the cloud. "Just like businesses in the ‘90s transitioned form mini-computer to servers," cloud-based services including hybrid cloud, are turning into the preferred mechanism of IT deployment," said Artale.
From macro to micro, the cloud and its investors aren't discriminatory against size in the slightest. Hansen explains that the cloud allows people to move to an op-ex spending rather than a cap-ex spending.
"So if I give an entrepreneur money, or if I'm starting a new business, my money goes a lot further than it has in the past," shared Hansen. "Instead of buying infrastructure that may be what I need, I can start small and build up without having to spend all my cash. I can start small and have the same infrastructure as any enterprise level company. We are pros at running the giants, why not the startup's as well?"
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