Structure 2010: What Are VCs Looking for in the Cloud?

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Just one deal in the cloud computing space closed in 2005, noted Lawrence Aragon, editor in chief for Venture Capital Journal and Private Equity Week at the GigaOM Network’s Structure conference today. But by last year the sector delivered 52 such deals, and so far this year there have already been 33.

For entrepreneurs hoping to win the next venture capital investments in the cloud, partners from Redpoint Ventures, Norwest Venture Partners, Accel Partners, North Bridge Venture Partners and GGV Capital offered some advice.

Investors like the idea of capital efficiency, of course, but panelists today drew a distinction between capital efficiency and capital raised. Ping Li, a partner at Accel Partners, said, “I don’t want to create the illusion that just because you’re in the cloud it will take less capital” to build a technology company. But cloud services can help companies stretch each dollar further (i.e. be more capital efficient) by focusing on iterating the product, rather than working on the infrastructure.

“It takes a lot of cash,” especially if you’re building “infrastructure-oriented companies,” said Promod Haque, managing partner at Norwest Venture Partners. “The majority of these companies, they’ll soak up $40 million, $50 million,” he said.

Michael Skok, general partner at North Bridge, noted a “fundamental business shift” underway in which companies are “trying to buy everything they can” as a service in order to focus more exclusively on their core competencies. This means that “every layer of the infrastructure is open for disruption.” But he warned that not every layer makes sense for startups. “The lower down you are in the stack, the potentially more dangerous it is today for small startups because you’re going to be chased up the stack by larger players,” he said.

Dharmaraj said Redpoint wants at least one of the founders in a cloud infrastructure startup to be “an out-and-out tech genius.” He also said the firm is looking for startups with a clear path to scale business up to $50-$70 million in revenue.

Glenn Solomon said GGV Capital is looking for startups pursuing a “dynamic and large market opportunity,” and thinking ahead to international opportunities “sooner rather than later,” since copycat companies quickly sprout up in foreign markets.

Haque believes we’ll “see interesting opportunities for middleware that encompass public and private clouds,” or what he calls the hybrid cloud, while Skok thinks some of the most valuable new companies will be “highly disruptive on impact, but not at all disruptive” in terms of habits. In other words, they’ll require no change in order for companies to adopt them. “The smart entrepreneurs figure out how to leverage legacy, rather than displace it,” he said.

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