VCs Have Their Heads in the Clouds

Cloud computing—computing power in the form of services from companies including Amazon—is drawing VC attention from Web apps back to infrastructure

by Stacey Higginbotham

When was the last time you bought software that came in a box, an actual CD you put into your disc drive? It's probably been a while, since most applications are now downloaded straight from the Internet. Now, a growing number of companies are buying their computing capabilities that way, too. Instead of purchasing a rack of servers from IBM (IBM), Dell (DELL), or Hewlett-Packard (HPQ), or a dedicated box hosted in a data center, businesses are buying computing power in the form of services from companies including Amazon (AMZN), GoGrid, and Mosso.

Such services are generally referred to as cloud computing, and the game-changing potential of those services has venture firms sitting up and taking notice. Indeed, after spending the past few years pouring money into Facebook applications and me-too social networks, venture firms are starting to invest in infrastructure again, with both hardware and software plays tied to the cloud.

"Clearly there is a renewed interest and investment in infrastructure," says Bernard Dallé, a partner with Index Ventures. "Twenty-four months ago it was all about the consumer Internet, and still a lot of money is going after that, but it has been rebalanced. Now firms see the value that EqualLogic and virtualization has generated, and it's time to invest."

Building Blocks

So far this year companies providing cloud services or building services on top of the cloud have raked in more than $70 million. That's nothing compared to the $14.9 billion that VCs invested during the same six-month period overall, but interest is picking up.

Just this week, 10gen raised a $1.5 million first round from Union Square Ventures to create a platform for programmers to build products on top of the cloud. Appirio, a company trying to help enterprise customers link their data among clouds offered by Google, Salesforce, and Amazon raised $5.6 million from Sequoia. And earlier this month, EngineYard raised $15 million from New Enterprise Associates, Amazon, and Benchmark Capital to build out a development platform for programs built using Ruby on Rails.

These companies join a growing ecosystem of startups trying to create utility and business models built on top of thousands of servers. If you peel back the fog surrounding cloud computing there are several layers of services. It all starts with a virtualized server running a hypervisor. Between the hypervisor and the operating system—such as Linux or Windows—sits a class of service providers, among them Elastra and Enomaly.