Investing into Cloud Computing: A Chasm of Understanding

I’ve started this blog while seating at the AlwaysOn Silicon Valley Venture Capital conference at Half Moon Bay, CA about few months ago. I was actually listening to a panel of VCs and CEOs talking about investment trends in clouds computing…

What did strike me as odd is how confused some of the people on the panel were about the basics of cloud computing – yet these people tried to look substantive with some level of knowledge on the subject. Topics like SaaS/PaaS, multi-tenancy, hardware virtualization, data center virtualization, compute and data grids were thrown around without much care or consideration. It’s ironic, for example, that most SaaS-based providers have absolutely nothing to do with cloud computing, and multi-tenancy has little relevance, if any, for private clouds that account for the lion share of the cloud computing…

It just reinforced for me the industry’s little dirty secret: most VC don’t know what cloud computing is and misunderstand it (even though each and every one of them think that they absolutely do – and act that way). But what is expected and accepted of VC crowd (acting like they know) was, however, a bit unsettling to have it coming from actual entrepreneurs.

Let me explain my point about cloud computing using social media and semiconductors – two well established areas of investment (absolute majority of companies seeking investment on this conferences, by the way, were in social media related segments).

When it comes to social media most ordinary people will understand almost any new ideas and some of the technologies since… most of us, including VCs, use these technologies daily. A lot of social media is ad supported and this has been “massaged” for a decade now and extremely well understood by investors. We’ve also seen number of successful social startups done by people with little technical experience at all. In other words, many, if not most, of social startups ideas have roots in well understood “daily” social dynamics – and therefore can be easily grasped by garden verity of associates and partners in VC firms.

On another tip of the scale – the semiconductors. Nothing can be more arcane or requiring substantial special knowledge and education to even remotely understand it (pharmaceuticals are close second). The whole sector has seen substantial downturn lately but fortunately VCs have built a significant understanding and knowledge base over almost four decades of heavy investment in semiconductors. Almost every respectable firm on Sandhill road has a partner or two with deep semiconductors background. And therefore, as with social media – but for very different reasons, the semiconductors can be easily grasped by most VC firms (that have this practice).

Enter the cloud computing… Not only no one is using cloud computing in their daily lives but absolute majority of VC firms don’t have anyone on staff to help them understand it either. Partners come to VC firms often through associateship coming from successfully exited businesses (to sit out non-compete terms, etc.) and cloud businesses are still too young for this transition.

So, we are left in situation when young upstart cloud computing companies need capital to grow and yet most traditional institutional VCs are incapable yet to understand/appreciate ideas – are therefore are unreasonably gun-shy.

The answer for many companies in this area: angels. Angels tend to take more risk easier but most importantly usually are much more up to speed with the latest technologies and trends allowing them better appreciate the new ideas before traditional VCs have their risks hedged. Furthermore, angel investment overall is slowly squeezing out traditional VCs from early stage investments – and that’s a good thing in my opinion.


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