Venture Investing: Clouds Reign

Cloud computing is a hot area for investors and startups, but Wall Street may not be buying the hype.

Cloud computing lightning is beginning to strike investors.

"It's an incredibly hot area for venture capital funding right now. Because this is such a significant shift in IT infrastructure, there's a desire to get into it early," said an entrepreneur who asked not to be named and who is planning to launch a cloud service in the next 12 months.

Some startups are bootstrapping themselves while others are obtaining funding in varying amounts.

PAAS (platform as a service) provider 10gen garnered $1.5 million in July from Union Square Ventures. Also in July, Engine Yard, which offers a cloud-based Ruby on Rails platform, signed $15 million in funding from New Enterprise Associates, with participation from and previous investor Benchmark Capital.

In June, Charles River Ventures and Menlo Ventures co-led an $11.37 million investment in ParaScale, a provider of cloud-based storage. RightScale secured $4.5 million in first-round financing from Benchmark Capital in April 2008. RightScale provides tools for developers to create applications for Amazon Web Services.

Elastra, a provider of cloud computing middleware, has received a total of $14.5 million from Hummer Winblad, Bay Partners and, according to Elastra CEO Kirill Sheynkman. "We're software that lets you design, deploy and manage applications in private and public compute clouds," said Sheynkman, adding that Elastra is particularly focused on enabling organizations to move existing applications to a cloud infrastructure.

Coghead, a PAAS provider on Amazon Web Services, has received $12 million in funding, according to company officials.

While venture capitalists may get the cloud concept, there are signs that Wall Street may not. Rackspace, a Web-hosting company that is investing in Mosso, a cloud computing capacity management provider, saw its August IPO open at $12.50 per share, only to drop to near $10 per share at the end of the first day's trading and languish in that neighborhood since then.

"There's so much hype around [cloud computing] now," said the entrepreneur who asked not to be named. "There's the feeling that it could only disappoint."