Startups rush to the cloud

Having a cloud computing startup has at some times felt like being part of the California Gold Rush, says Nand Mulchandani, CEO and co-founder of ScaleXtreme, a 2-year-old company focused on easing management of multi-cloud environments.

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Scads of entrepreneurs over the past few years have launched companies in an effort to grab a share of the riches they've seen companies such as Amazon Web Services, Rackspace and VMware reap. And why not? Forrester last year projected that the cloud computing industry will grow six-fold from $40 billion in 2010 to $241 billion by 2020.

Frank Artale, a venture capitalist at Ignition Partners, says the cloud represents the next major shift in enterprise computing, and that VCs are aggressively investing in cloud startups. "Initially this move [to the cloud] will create more complexity," he says. "Companies that can enable the use of cloud, virtual networking and storage will get lots of attention." Artale is among investors at Mulchandani's ScaleXtreme, which has raised $13.5 million.

Network World this week released its latest list of hot cloud computing startups, including ScaleXtreme, and these companies in total have raised more than $160 million - including one startup that itself has raised $60 million.

Peter Sonsini, managing partner at New Enterprise Associates (NEA), says investments in cloud companies are still "very robust" even though overall VC investments are down by about 20% from a decade ago.

There's been a shift in the type of cloud companies that VCs are funding, Sonsini says. The early days of cloud computing was about the infrastructure that makes the technology work. Now, investments are focused on optimizing how customers can use the cloud and better manage it. Sonsini, for example, sits on the board as an investor in Embrane, which Sonsini says was one of the original players in the software-defined networking market that has seen increased attention ever since VMware's $1.2 billion acquisition of Nicira in July. Embrane helps enterprises manage their SDN environments by virtualizing network application tools such as load balancers, firewalls and VPNs.

Out of the dozen companies featured in our hot cloud computing startup list, most have received less than $10 million in VC funding. Part of the reality, Sonsini says, is that it simply takes less money to start a company now because entrepreneurs can leverage cloud resources.

Milind Gadekar, whose startup CloudOn has raised about $26 million, says a decade ago he would have needed nearly double the amount of money to start his company. By leveraging Amazon Web Services' cloud, CloudOn has not needed to buy back-end infrastructure to support the company, which makes an application for accessing Microsoft Office tools on mobile devices. Other companies are bootstrapping the operations themselves. OneOps, for example, aims to make application development and deployment easier, and the three former eBay engineers that started it have invested their own money in the project for starters.

Sonsini says after the Internet bubble of the early 2000s the VC community got too inflated with lots of new investors coming into the market and throwing around a lot of money. The contraction of recent years has somewhat right-sized the market to a level where he believes there are an appropriate amount of startups being funded to not saturate the market, but to still allow promising ideas to flourish. We'll see just which ones make it big in the cloud computing realm.

Network World staff writer Brandon Butler covers cloud computing and social collaboration. He can be reached at BButler@nww.com and found on Twitter at @BButlerNWW.

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