Skytap Seeks to Make Cloud Computing Work Better

Turn on a TV, and you’ll see Microsoft running commercials touting something few men on the street know much about—cloud computing. So if the concept is starting to go mainstream, it shouldn’t come as a surprise that one of Seattle’s early movers in the space, Skytap, has already made some serious headway with its cloud computing offering in the past year.

Skytap made news yesterday when it said it pulled in a $10 million Series C venture round, led by Boston-based OpenView Venture Partners, and which included a trio of the company’s Seattle-based backers—Madrona Venture Group, Ignition Partners, and the Washington Research Foundation. I chatted with CEO Scott Roza yesterday to find out more about what the company is really doing to collect that kind of cash.

The company was founded in 2006 by University of Washington computer science professors Brian Bershad, Hank Levy, and Steve Gribble, as well as grad student David Richardson, back when there most certainly weren’t TV commercials on cloud computing. The basic idea with the cloud is that customers rent servers on a pay-as-you-go basis, and get access to their data (and processing power) anytime over the Internet. It’s supposed to allow organizations to save money and headaches by not having to buy and maintain their own in-house servers and other equipment. The big boys of tech—Amazon, Microsoft, Google—are all duking it out for market share in the early days of what some analysts predict will grow into a $60 billion market based on this recent model of computing.

So where does a little company like Skytap, with 30 employees, fit into this equation? While the big players are providing the essential infrastructure, Skytap sees itself as a maker of software that sits on top of the cloud systems offered by the other guys. The software applications are supposed to make sure everything runs automatically and seamlessly, especially when engineers are testing a new product, and teams from multiple geographic locations are trying to collaborate. The software layer of the cloud computing market, where Skytap sees itself playing, is probably worth more like $4 to $8 billion over time, Roza says.

“The power of Skytap is in the software, not infrastructure,”

Roza says.

These are still very early days in the shift toward the cloud, and there’s a lot of curiosity among customers about what they might consider doing there, Roza says. Skytap has certainly had an interesting lens on how this market is evolving. The startup introduced its product about two and a half years ago. So far, early adopters on the IT side of organizations like Ellie Mae, Nuance Communications, Apptio, and Hargis Engineers have bought what Skytap is selling. Skytap also found its way into an important new stream of government agency customers last September when it struck a partnership with CSC (NYSE: CSC) to provide software for that company’s cloud-based development and test service.

Last year was a big one for market adoption, and that caught the eyes of the VCs. Skytap doubled its customer base, and has a goal of doing it again this year. The company doesn’t disclose its finances, but it has 150 customers now, and it’s close enough to profitability that the $10 million financing provides “indefinite runway,” Roza says. It’s possible that Skytap could double its headcount this year, through hiring sales and marketing people as well as more in R&D, Roza says.

But clearly, the new financing is really about taking a company that has cleared a lot of its early technical hurdles and pushing it forward into a bigger sales and marketing player. That’s why OpenView Venture Partners made sense as the lead investor, Roza says.

Interestingly, OpenView didn’t come to this story through connections to the earliest VCs. OpenView had been scoping out the cloud computing space for a while, identified Skytap in a Gartner Group report, and started doing its own digging. As he got to know senior managing director Scott Maxwell and the OpenView crew, Roza says he was intrigued by the firm’s track record with helping startups get to the next level with expansion capital. But interestingly, OpenView offered more than just a track record. It also can provide actual help in sales and marketing through what it calls “OpenView Labs.” This is basically a small group of people OpenView employs to test marketing messages on customers, and offer advice to portfolio companies on how to tweak messages to better match what the customers want.

This will be an interesting time to survey customer attitudes about cloud computing. The field is mainly growing on usage from early adopters, and on new computing projects—not so much on migrating existing projects from in-house servers to the cloud, Roza says. Prices of cloud computing infrastructure rates have come down, which certainly helps customers justify making the leap now when the economy is still weak. The classic question—to build it in-house, or buy a product—is the main thing that customers need to wrestle with when they decide whether or not to buy from Skytap, Roza says.

These are sophisticated customers Skytap is dealing with, at the levels of chief information officers or vice presidents of engineering. They may get swept up in buzz like anybody else who watches a Microsoft TV commercial, but for Skytap to be successful it needs to make a strong case that its cloud computing software can save companies more time, money, and staff headaches. If the company can put its new capital to work on that front, it will be on its way to becoming what Roza calls a “large independent company” in Seattle.

Of course, it’s still too early to say if that will really happen. A lot of fundamental things to any business need to happen first.

“You have to build a terrific product, and wow your customers every day so much they tell their peers,” Roza says. “If you do those things, the rest will take care of itself.”