Forecast: Cloud (Computing) with a Chance of Storms Later

Whenever the media and financial pundits see a disproportionate flood of money going to any one industry segment, they seem to collectively scream: BUBBLE!! Internet? The refrain is impossible to miss and has only gotten louder. The only thing growing faster than secondary market valuations is the din of observers claiming that the valuations parallel those of the late 1990s.

So how come we’re not talking about a bubble in the cloud space?

Apple’s going to the cloud. It aims to revolutionize its content distribution system so customers can store and access information among smartphones, laptops, tablets, etc. Kleiner Perkins’ Matt Murphy just told Reuters the VC might establish a fund wholly dedicated to cloud investing, flying in the face of portfolio diversification. Accel, Sequoia, Canaan, name a tech investor and chances are (overwhelmingly) they’ve found a cloud investment they liked. For crying out loud, there’s an ETF dedicated to cloud investing that just was announced!

“You’re seeing a land grab mentality right now,” one VC says, speaking under the condition that neither he, nor his firm, were publicized. “You have to be careful about where you are going to put your money and how much your money is going to pay.”

Florida-based Citrix Systems made sure the investment from Redpoint Ventures, Index Ventures and Nexus Partners in paid off, when it spent between $200 million and $250 million (the dollar figure was reported by TechCrunch) to buy the cloud infrastructure developer earlier this week. Each of the VCs has several other investments in the cloud industry, so they’ll be looking to replicate the success. Also earlier this month, Dimension Data, the NTT Holdings subsidiary, acquired OpSource, which online industry trade rag Talkin’ Cloud said was the top tech company in its space by revenue for 2010. Clearly, strategics are in need of cloud technology to quickly scale their own platforms, so they do not risk becoming hardware developers in an age of commodity hardware storage.

Investors in cloud technology and storage assume the value of this virtual space, this data locker, and its relevance within the Internet ecosystem will each be sustainable. They are betting on a persistent need from strategics to invest in cloud infrastructure for years to come. Some VCs recall the first tech boom, in which companies scrambled to develop their own limited-access, temperature-controlled data rooms, physically and in the confines of offices. Of course, the new transition from physical, on-site storage to the cloud and virtual storage seems almost natural with the increasingly mobile capacity of the Internet. In fact, cloud investors might argue, where else would you possibly store data? The ‘star?’

Investors are also betting against the possibility that we will soon develop an overabundance of cloud storage and compute resources. Right now, the only option for early-stage cloud storage investors is the strategic acquirers, and they must be feeling fortunate to enjoy such a sellers’ market. Any VC investing in the cloud space (especially those that could dedicate an entire fund to it) must do so with expectation of continued exit opportunities – including IPOs – that are valued similar to or greater than today’s strategic cloud deals.

“There have not been many good exits in the space yet,” said a senior VC, whose firm remains in several cloud investments. “During the telecom overbuild there were many years of good exits before the bubble became obvious.”