After more than a decade of hype and billions of dollars of value creation, it would be reasonable to expect investors to start losing interest in cloud-related startups. In the venture business, me-too investors reap ever-diminishing returns compared to early entrants in a new sector. And while the sweeping transformation that began with the migration of non-critical applications from the data center to the cloud has proven massive indeed, it’s certainly no longer early days.
Indeed, even the second wave of cloud opportunity — essentially reinventing the infrastructure underlying cloud applications to meet the growing demands for performance and scalability in an increasingly mobile, app-centric world — has begun to level off in terms of new opportunity. The enabling technologies that were hand-sewn by cloud pioneers like Google or Facebook are becoming more and more commercially available; one by one, obstacles are being eliminated and problems are being solved, primarily by startups.
A number of startups addressing cloud scalability challenges for massively scalable web applications have already become market leaders (Fusion-io and Palo Alto Networks) or have achieved outstanding exits by being acquired by market leaders (Nicira and XtremIO). There’s still plenty of room for innovation, especially around mobile bandwidth and real-time interaction with diverse data sets, and it’s still early in the cycle as far as value creation and exits. But the days of low-hanging fruit are well past.
Yet cloud computing touches every software-related company that we invest in today in one way or another. Why? If the first wave of cloud computing was all about applications (SaaS), and the second wave was all about fixing everything that the cloud breaks (networking, storage, security, etc.), then what’s left?
A lot, as it turns out. Because cloud didn’t just change everything — it also enabled an entirely new opportunity set — “de novo” applications that could not have existed prior to cloud computing. So on the downslope of the first wave of the cloud transformation, the underlying architecture was a severely limiting factor. But that second wave doesn’t just allow us to fully exploit the first; it also fueled a third: agile development of cloud applications, utilizing cloud APIs, application assembly and other techniques to rapidly enhance developer productivity.
NoSQL databases are fundamental components of the agile development movement, allowing a team to start coding an application immediately and forego the long drawn out process of planning a database schema. In general, the hopper is loaded with great future exits for companies that play into application assembly: security and authentication services (e.g., Stormpath); communication (Twilio); integration between cloud and on-premises applications (MuleSoft); application deployment and management (Docker); analytics (Keen.io); and application delivery controllers (NGINX).
This next-gen development wave is still ramping up and “application aware” is quickly becoming the new catch-phrase in technology infrastructure.
“Big data,” a hype cycle unto itself, starts earning its keep in this third wave. Now that we know how to process, serve and store the massive volumes of data being generated, we can finally start doing something with it. Next-generation cloud applications are dynamically data driven; the data consumed by a given application and how it reacts to that data will be key differentiators. The application will leverage programming interfaces based on open web standards to ingest and crunch this data from multiple sources, while also exposing its own set of services to others with open APIs.
What about the underlying infrastructure technology? It too looks different going forward.
The scalability of the technology will be at hyper scale. No longer will it just be about using virtual compute but also virtual networking and storage technologies. And the data layer will embrace a new wave of technologies offered by next-gen infrastructure companies such as MapR and Hadoop for data warehousing or Databricks and Spark for real-time analytics.
This new wave of opportunities, likely to drive venture returns well into the next decade, combines modern technologies across all layers of the stack — from the very top access tier down through the business logic and data persistence layer — with the scale of cloud computing to deliver something that legacy technology could never achieve: data-driven, mobile-first, personalized cloud solutions, leveraging open APIs and operating at hyper-scale in real time.
The stack was the great divide between the past and future of cloud, and it makes for a fairly effective sniff test when looking at new cloud investments. Similar to the way customer acquisition cost ratios, “magic number” and ROI became the de facto metrics for screening SaaS businesses, investors looking for de novo cloud opportunities need to assess the extent to which the company has embraced the modern cloud stack.
The former criteria have become so prevalent in cloud entrepreneur parlance that we rarely get five minutes into a presentation before someone mentions unit economics. Today, we’re just as eager to assess the pervasiveness of cloud at every layer of their business, from the way the application is designed to the underlying guts of the infrastructure powering the application.
The cloud has suffused the innovation landscape; it’s intrinsic to how we think about technology today and a building block for everything that comes next.
And from this VC’s perspective, it’s got a pretty long runway.
Note: some of the companies referenced, Fusion-io, Mulesoft, Nicira, NGINX, and Stormpath are NEA investments.