What are VCs looking for when investing in a cloud startup? Lawrence Aragon Editor-in-Chief, Venture Capital Journal and Private Equity Week, led a panel of VCs who answered the question. Here’s a wrap-up of the conversation:
Panel VCs are: Satish Dharmaraj, Partner, Redpoint Ventures; Promod Haque, Managing Partner, Norwest Venture Partners; Ping Li, Partner, Accel Partners; Michael Skok, General Partner, North Bridge Venture Partners; and Glenn Solomon, Partner, GGV Capital.
Aragon: What does 'cloud' mean to you?
Dharmaraj: ‘Cloud’ is really overused. It’s really anything that’s elastic.
Haque: It’s infrastructure being provided in a cloud environment.
Li: For us, it’s almost boundary-less. Right now mobile is one of the boundaries. 'Cloud' is defined by user-driven infrastructure.
Skok: This isn’t a tech shift; it’s a fundamental business shift. Companies are trying to do everything they can as service. Someday you’ll be buying everything you do as service, like you buy electricity today. We’re still early on in disruption in infrastructure.
Aragon: Can you have a capital-efficient cloud company with only $20-30 million in VC funding?
Solomon: That’s happening all the time.
Skok: The business model for cloud is important – it’s all about low cost of customer acquisition.
Li: The capital is much more efficient today than it used to be. You can iterate quicker, distribute your product and get feedback much quicker. But I don’t want to give the illusion that just because you’re in the cloud it’s cheaper to build a company.
Haque: I think it takes more than $20-30 million. Most of these companies will soak up $40-50 million in VC funding, no problem. I’ve got numerous headaches with funds where co-investors have run out of cash and they want to sell the companies. At the end of the day, if you’re in a deal, you’ve got to carry your weight.
Dharmaraj: What we’re looking for is a go-to-market where the customer acquisition cost is greatly reduced, like open source or freemuim. We’re looking for non-traditional business models.
Skok: SaaS companies have taken 2/3 times more revenue to get to market than regular software. The big problem is the business model. With subscription-based services, it’s is harder to get the same lifetime value out of a customer that you'd get selling them enterprise software.