How Long Will VCs Fund Cloud Computing Companies?

Recent news that Joyent, a software provider for cloud-based companies, received $85 million in new funding points to a persistent question: How much longer will venture capitalists (VCs) continue to fund cloud computing companies? Knowing the answer to this question is vital to a large number of cloud-based start-ups and established companies.

The expanding tendency of the cloud computing market is readily apparent. In the past, the return rate for VC firms has been positive as the cloud market remains robust and shows no signs of diminishing. Aspects of cloud computing now permeate the global consumer and business markets. Almost every aspect of media, both in the creation and the consumption, has been positively affected. Companies, too, have quickly adopted the technology, both in the form of public and private clouds.

But in the world of funding and venture capitalism, new opportunities are always on the horizon. In terms of statistics, a recent VC report sponsored by PriceWaterhouseCoopers and the National Venture Capital Association, and based on data from Thomson Reuters (News - Alert), showed a decline in the number of companies funded.

According to the MoneyTree report, VC firms invested $28.4 billion in 3,673 deals in 2011, an increase of 22 percent in dollars and a 4 percent rise in deals over the prior year. However, the report also showed that fourth quarter investments resulted in 844 deals totaling $6.6 billion. This represented an 11 percent decrease in deals from the third quarter of 2011 when $7.3 billion went into 953 deals.

According to Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers (News - Alert), “Despite the increase in investing, we're unlikely to see these [Internet] sectors overheat like we saw in the 1999 to 2000 era.”

This trend may just be a natural outgrowth of the desire of most VC firms to accrue high returns from cutting-edge investments. Indeed, the decrease may simply mean that cloud computing has now become so accepted that it is a natural part of the current computing landscape, and that VCs are already looking for the “next big thing.”

The MoneyTree Report also stated that industries receiving the most dollars in first-time financings in 2011 were Software, Biotechnology, and Media/Entertainment. In addition, industries with the most first-time deals in 2011 were Software, Media/Entertainment, and IT Services. This indicates the possibility that the adoption of cloud-computing has truly reached a saturation point although technology-based investing shows no sign of abating.

So the question remains for cloud start-ups, how can you value-add to the already important trend that is cloud computing? And what technological innovation is just around the corner and ripe for adoption? There remains a strong possibility that cloud funding will continue into the next decade although not at previous levels. In fact, it may just be time for cloud-based startups to read the writing on the wall.

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