The top 5 trends cloud-focused VCs are most excited about

Cloud computing is one of the hottest areas of venture capital. Investors see it as a rapidly growing sector with massive opportunities and the long-term potential for huge returns. The theme of VentureBeat’s upcoming CloudBeat 2013 conference is “the cloud grows up.” As the sector evolves, so do the investment opportunities.

But “cloud computing” is a general term. Under that umbrella, there are companies working on solutions for cloud infrastructure, security, storage, hosting, data analytics, mobile, IT, customer service, integrations, and operations. Others focus on specific verticals, like health and education. Most of the major VC firms have at least a couple of cloud companies in their portfolio, but a few sub-sectors are attracting more attention than others.

We asked some of the most well-known cloud investors what technologies they are most excited about. Here’s what they said:

Illuminate Ventures — Optimizing performance

Illuminate Ventures is an early stage venture capital firm that focuses specifically on enterprise cloud computing. Founder and managing partner Cindy Padnos has worked in the industry for 25 years. She said Illuminate is most interested in companies that drive business results.

“We’re seeing a wide array of companies building solutions that may not seem to be very sexy, but deliver tremendous value,” she said. “We tend to seek companies that bring unique solutions to the market, not just from a technology perspective, but also in terms of their business models and the customer segments they target. These types of companies can drive  top line revenue and bottom line performance.”

As more companies, large and small, shift their operations to the cloud, they want to use technology that helps them operate more efficiently and data that helps them engage their audience as effectively as possible. Padnos said she is bullish about companies that help businesses optimize sales and marketing efforts using cloud-based solutions. Portfolio company BrightEdge does this with an enterprise-grade platform that applies big data analytics to search engine optimization (SEO).

Cloud-based marketing tools are promising when it comes to acquisitions. Salesforce bought cloud-based marketing firm ExactTarget for a massive $2.5 billion this year and Oracle bought Eloqua for $871 million in December 2012.

Padnos also expressed interest in vertical solutions, as well as operations management, security, and cost management.

Emergence Capital — Verticals and mobile-first

The first generation of cloud companies, like Salesforce, tried to cater to every sector. The tide is changing, however, and venture capitalists are betting on startups that have a narrow focus.

“The cloud has enabled a new breed of vertical industry cloud solutions that are capital efficient and can really meet the needs of customers in a specific industry,” said Sean Jacobsohn of Emergence Capital. “As opposed to horizontal solutions where the market leader gets 5-10% of the market and expands by attacking more industries, vertical solutions can become the industry standard and expand by selling more solutions to the same buyer.”

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A healthcare company deals with regulations that are significantly different from a financial company.  A vertical strategy lets entrepreneurs apply deep domain expertise to an industry and respond to its unique requirements. Jacobsohn, Padnos, and Andreessen Horowitz’ Frank Chen have all mentioned vertical cloud startups as appealing.

Jacobsohn also brought up mobile-first technologies. Mobile technology has transformed the way businesses with distributed workforces operate. The Bring-Your-Own-Device movement has taken off, setting off a wave of startups that develop applications to keep workflow smooth and boost productivity on-the-go. This movement has also led to high-demand for security startups building products to protect data when it is entered and accessed from outside the enterprise network.

Bessemer Venture Partners — Platform-as-a-service

We are in the midst of a PaaS revolution. Developers are increasingly looking for ways to build applications easily without worrying about underlying infrastructure, and platform-as-a-service startups can help them do that. This is a small sector of cloud, but it is growing quickly.

Byron Deeter is a partner at Bessemer Venture Partners and a cloud expert. He recently compiled a Cloud Computing Index, which found that public cloud companies are now worth $100 billion. Deeter said that the application side of the market went liquid first, and most IPOs have been from software-as-a-service (SaaS) companies. The activity is moving down the stack, he said, and into platform layer.

“PaaS is seeing a dramatic increase in activity, and it is growing faster than SaaS or infrastructure-as-a-service,” Deeter told VentureBeat. “We suspect that the other two layers of the cloud will usher in more public companies in the coming years. There is an important element in this trend where developers are empowered as buyers.”

When looking for potential PaaS investments, Deeter said Bessemer looks for high value, low friction services that have a developer-centric and product-centric mentality. He said the founding teams tend to be “wickedly smart” and comprised of “alpha engineers” that are changing how applications get built and ultimately making it easier. He cited portfolio companies Twilio and SendGrid as notable examples.

Deeter also mentioned mobile-first cloud businesses as important, particularly in emerging markets where mobile is leapfrogging the Web. He and Jacobsohn both said that there is an increasing amount of activity coming from areas outside of Silicon Valley.

Accel Partners — Data tooling

Data is proliferating faster and in greater quantities than ever before. Amidst the vast oceans of ones and zeros is a wealth of information that businesses can use to make smarter decisions. But all this data means little unless there are products and services that help derive value, Accel Partners’ Jake Flomenberg told us.  In June, Accel announced the formation of its Big Data Fund 2 that will focus on investments in data-driven software to help people who aren’t data scientists extract insights from this data.

“There is a natural progression over time as data platforms mature. The first thing is arming the more technical folks, and later you see more targeting of business users,” Flomenberg said. “You don’t need mythical data scientists to operate with big data and ask questions. We’ve invested in a number of data tooling companies that make people more productive and allow the really high value data scientist resources to focus on important stuff.”

Flomenberg mentioned Accel portfolio company Origami Logic, as an example. The company brings together data from SaaS marketing tools and provides visibility across all of them. He also brought up Sumologic, which provides a log aggregation system to bring all data into a centralized place, and RelateIQ, which automatically enters data into your CRM to help your businesses keep track of and optimize relationships. These tools analyze data for patterns and signals and present the information in actionable forms.

North Bridge Venture Partners — Outservicing

North Bridge Venture Partners recently completed its third annual survey on the future of cloud computing. General partner Michael Skok, who spearheaded the effort, said it is still early days in the “cloud-computing revolution.” Businesses of all sizes are migrating to the cloud, and the greatest opportunities are for companies developing services to support this trend.

“In the future, I think cloud services will be completely integrated into the business process,” Skok said. “Businesses will be able to outsource, or outservice, everything they aren’t uniquely good at. The cloud gives anyone the ability to access and knit together services. What will be critical is the ability to integrate all these different services together.”

Cloud services make it easier for businesses to get off the ground. Clothing designers with no technical ability can use an e-commerce store builder to set up everything from displays to payments, starting a blog and startups can automate their hiring and payroll processes rather than hiring someone to take on the HR role full-time. Skok anticipates that we’ll see a number of enterprise APIs arising to bring all of these processes and data together cohesively,

Confidence in the cloud

A recent report conducted by Deloitte and the National Venture Capital Association found that cloud computing is one of the sectors investors feel the most confident about. Within this sector, there is a lot of diversity. Each investor VentureBeat interviewed has a specific area that excites them most, but common themes emerged. Cloud-based tools and services that enhance business operations will play an increasingly significant role as small business and enterprises alike migrate to the cloud. As more and more businesses adopt cloud technology, cloud companies are beginning to narrow their focus and apply industry expertise to specific verticals. The fact that cloud computing is so prevalent has created a need for companies that make data more accessible and that protect that data. Lastly, the entire world is going mobile, and there is high-demand for cloud services that are ahead of this trend.