VCs take another run at the cloud

One of the better known flops of the dot-com era was the Application Service Provider, the startup that hosted software in a data center so users could access it over the Internet rather than keep it on an internal server.

ASPs, as they were called, raised millions of dollars in venture capital while trying to shove big chunks of software down small pipes. A few years later, they were gone.

But the idea of ASPs has come back under a different name. Now it’s called cloud computing, and once again, venture capitalists are excited.

Asheem Chandna, a partner at Greylock Partners, says that the firm has one-third of its investments in cloud companies. He says that mid-size business customers can get cheaper and more reliable service in the cloud “than what their IT organizations could provide on their own.”

VCs don’t always agree on what the term “cloud computing” means. It can include virtualization, online storage, software delivered as a service and big masses of shared data, according to several who spoke to entrepreneurs and developers last month at an event in Palo Alto, Calif., sponsored by SDForum.

But just like a decade ago, several investors are predicting big growth for cloud computing. PricewaterhouseCoopers expects the market for software sold as a service to grow 60% next year, and a report last month from the Sand Hill Group, an investor and consultant in San Francisco, talks about “a $100 billion-plus opportunity” in the cloud. “Think back to 1997 and the buzz surrounding the Internet,” the group says in its report.

Andy Vitus, a venture partner at Scale Venture Partners, cited HTML 5 and JSON, a Java-based format for exchanging data, as ways for companies to help their applications communicate in the cloud. He also likes the idea of companies being able to control their capital costs by quickly turning on servers if they get a large number of users at one time.

New opportunities in the cloud are abundant, these VCs say, even though the public cloud is already dominated by Amazon and Rackspace.

Vitus called for more tools to monitor and manage the cloud and said he’s looking for a database that can replace Oracle’s MySQL, which he thinks “has started to fall over in terms of scaling.”

He also cited RightScale as a cloud success story that helps companies get up and running on the cloud and has raised $17.5 million from Benchmark Capital and Index Ventures, according to Thomson Reuters (publisher of PE Week).

The cloud “is a very significant evolution in the computing business—comparable to the shift from mainframe-based computing to client/server or to the Web model of computing,” says Mike Volpi, a partner at Index Ventures. “As a result, virtually every component of the software value chain has the opportunity to be redefined.”

Still, as with all new technologies, the cloud has problems, with some bigger than others. Big business customers so far are wary of the public cloud and have tended to go with private clouds, which they can control better. Customers have been reluctant to switch entirely from running their software on premises to running it over the Internet, and the responsibility for support, privacy and security in the cloud is sometimes unclear.

But the cloud is growing popular among some types of customers, such as social gaming companies Zynga Game Network and Playfish (which is now owned by Electronic Arts), which use it so they scale fast to accommodate big groups of players.

New Enterprise Associates Partner Peter Sonsini says he’s cautious about funding companies that don’t buy their software as a service over the Web.

Sonsini, who previously worked at VMware before he became a VC, says that the cloud will continue to improve.

“The cloud is the biggest thing going on that we have to pay attention to,” he says. —Deborah Gage

Alastair Goldfisher contributed to this story.