VC: Cloud Bubble Has Arrived

Cloud computing stocks are up roughly 60 percent since January 2010. And venture capitalists continue to pump millions of dollars into cloud computing start-ups. The result: We’re in a cloud bubble, according to a key venture capitalist that has multiple cloud and technology investments. But the bubble isn’t cause for panic, according to Scott Maxwell of OpenView Venture Partners.

“There is definitely a cloud bubble going on right now,” Maxwell says. “This is not necessarily a bad thing, however, as there is an amazing amount of innovation going on and each company is helping to build the awareness and interest of companies that will eventually moving more of their resources to the cloud. There are some very high valuations out there, however, and it will be interesting to see if the markets develop fast enough to warrant those valuations.”

Indeed the Talkin’ Cloud Stock Index rose more than 7 percent during the first two weeks of 2011, and the index is up more than 60 percent since January 2011.

More Money

Despite the potential bubble, investments in cloud computing companies continue. OpenView Venture Partners has a longstanding stake in Intronis—the online backup company that works closely with VARs and managed services providers. More recently, OpenView invested in Skytap, which builds cloud automation solutions.

“Our investments focus on markets that can allow a company to get to $100 million in revenue, which can be a limiting factor for some companies, but the cloud companies that we have seen so far meet this criteria,” says Maxwell. “The particularly interesting companies provide infrastructure that enhances private or public clouds or provide a useful service of one kind or another. Our general belief is that there is a megatrend toward the cloud compute architecture that will continue over the next 10-20 years and we are aggressively looking for companies that are capitalizing on this new architecture by offering unique products and services to their customers.”

Still, the recent recession impacted OpenView’s investment horizon. Generally speaking, OpenView is a long-term investor. And the recession “The recession made it more difficult for many companies to have high growth rates, so it probably added a year to the timing of liquidity events. That said, perhaps the next couple of years will have much higher growth and companies will catch back up. Hard to say.”

Strong Optimism

Either way, Maxwell remains upbeat about the cloud computing business model. “My view is that all technology companies should consider the cloud architecture and how they can use it to improve their value proposition and competitive advantage to their target markets and, perhaps, new target markets,” he says.

“The cloud, when combined with APIs, Uis (mobile/tablet/laptop/etc), and applications and information of others has an almost endless number of possibilities for value and competitive advantage and every technology company should have some angles to compete. My best advice to those companies is to consider the possibilities and act on some of them. My second best advice is to contact me if they are looking to raise capital!”