With Dropbox valued at $8B, meet high tech’s new bubble: Cloud storage

Cloud storage companies are sucking up investor money at a furious rate as they gird themselves to compete.

And naturally, not all of them will emerge victorious.

Last night, the New York Times reported that Dropbox is seeking to raise another $250 million, which would value the five year-old startup at more than $8 billion. It previously raised a $250 million round in October 2011 at a valuation of $4 billion. The company has seen enormous success among consumers, but now it’s trying to drum up interest in a different market.

The determining factor in who succeeds in the cloud storage sector will be enterprise adoption. Everyone wants to be the Dropbox for enterprise — including Dropbox, which last week unveiled a major redesign for the more than four million businesses using its service.

But unlike competitor Box, which focused on businesses first and is highly regarded by VCs, the press, and clients in finance and health for its heightened security, Dropbox targeted the consumer market first and has been repeatedly criticized in the press for security lapses. Until it can prove that it has enterprise-grade security, Dropbox is going to have a tough time escaping its consumer pedigree.

Raising the money will help Dropbox get there, of course — even if it’s only to bolster the balance sheet, not to embark on some grand engineering project. The more money that these vendors have, the safer it is for enterprises to take a bet on them.

Other cloud storage vendors are also moving to focus on the enterprise market. Hightail (formerly YouSendIt), which originally focused on cloud storage for creative professionals, picked up $34 million earlier today to court the enterprise market. And Egnyte recently rebranded to shift its focus from small to medium businesses to large enterprises — and there will be more funding news on that front shortly, I’ve been told.

But industry experts question whether the sector has room for all of these storage vendors.

“There is definitely a sense of over-optimism,” said Bipul Sinha, a partner at Lightspeed Venture Partners, in a conversation with VentureBeat. “Only one company will become a really major player.”

With more than 200 million active users, Dropbox already has a sizable audience — and a lot of those people bring it to work with them. Dropbox has a Trojan-horse style opportunity here to sneak into the enterprise, promising IT departments greater control and security for the app their employees are already using. But that’s unlikely to work for major enterprises with stringent security requirements.

“I think it’s very unlikely that a company like GE would use Dropbox, given their security requirements,” said Ray Wang, the founder and principal analyst at Constellation Research.

The cloud storage market, like all cloud computing sectors, should continue to grow for the foreseeable future. But until one of these companies goes public, it won’t be clear how much the market is actually worth, as private company valuations are very different from the stock market.

That means Dropbox’s current $8 billion valuation (or any of these other companies’ supposed values) isn’t really that important. What will truly determine the longevity of these businesses is — in this order — exemplary security, enterprise penetration, and a healthy public market reception.

And whichever player emerges victorious is unlikely to share the spoils.

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• Dropbox details its shift from consumer file storage to enterprise data hub
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• Egnyte rebrands to bring ‘PRISM proof’ file-sharing to the enterprise