One of the unanticipated ways cloud computing is impacting the technology world is this: It’s completely rewriting the rules of early-stage venture capital investing.
From driving down the costs of building a company to enabling massive scalability out of the gate, the cloud has resulted in venture firms seeing deals requiring smaller capital requirements, but more of them. That cloud computing is a big draw for venture investors should come as no surprise, as it enables young companies to greatly reduce the time it takes to get their products to market.
“I just have to get in my car and drive up on the freeway and I’m going 80 mph right away,” says Scott Orn, a principal at Silicon Valley venture firm Lighthouse Capital. “It’s amazing.”
It’s a win/win scenario: young cloud companies needing less money to fund their initial pushes can reduce the amount of control and ownership they have to give up, and venture fund managers looking to make the most of their investment dollars in a tough economy get to take “more shots on goal,” as Orn puts it.
Orn, whose investment portfolio includes young cloud-related companies trying to break into both the corporate computing and consumer applications markets, says the smaller early-stage investment needs are having a trickle-down effect.
“The reduction in infrastructure costs and risk can ripple through the ecosystem and open up early stage investing for a whole new class of investors,” he says. Orn points out that so-called “super-angels,” or private investors who make larger, later investments than traditional seed angels, are now able to fund deals that previously would have required venture capital backing.
Meanwhile, Orn says the mere presence of cloud computing is altering investment decisions, as venture investors are more interested in companies that are leveraging cloud computing rather than getting bogged down in establishing their own IT operations. So, if a venture capitalist was faced with two companies offering equally great services, but one was using Amazon’s Elastic Compute Cloud or some other mature cloud offering to meet its peak computing needs while the other was building its own data center, Orn insists the decision would be simple.
“You’d run away from the second company,” he says. “It’s table stakes; it’s like coming to the table without an ante. That’s how much people trust Amazon.”
That growing trust in cloud computing is a huge development. By encouraging the young companies of today to take advantage of the cloud, the venture community is, in effect, acting as a cloud advocate and ensuring its growth.
Ironically, though, venture investors are much more skittish when it comes to startups looking to actually become cloud providers. Startups looking to establish themselves as fully integrated cloud solutions face stiff competition from the big, established IT vendors, Orn says. And even those companies that address a cloud niche still often face too many questions about their future. “I wish we had more cloud companies to invest in,” he says. “But they’re very early in their lifecycles right now, and they haven’t quite matured to the level we’re playing at.”
Any cloud provider startup hoping to secure venture funding should be focused on doing one thing very well, Orn says. If such a company can demonstrate that it has a disruptive technology that has the potential to define a new market, venture investors become much more interested. For instance, one of Orn’s portfolio companies, Delphix, specializes in the largely untapped area of database virtualization.
But with the cloud provider market increasingly crowded, such companies are few and far between. Conversely, entrepreneurs are creating myriad innovative new services that leverage the cloud’s low-cost, ready-made IT infrastructure. It’s an exciting new startup business model for a venture capital industry in search of lower risk and faster returns.
“Instead of funding infrastructure costs, [venture investors] are actually funding real apps and business services,” says Orn.