Software Revolution, Part II: The Shift to Cloud Computing

Written by Josh Manchester

(This is the second installment of a four-part series discussing large technology shifts and their impact on enterprise software and venture capital investments. Click to access Part I, Part III, and Part IV.)

What is cloud computing?

Cloud computing, simply stated, is the ability to use files and applications over the Internet instead of hosting, storing, or processing them on locally managed hardware.

Thanks to a series of advances in data storage, security, and transmission, individuals and enterprises can now store their data remotely in a third party facility. Because the data and software in use is not physically stored, it's as though it were floating in a cloud.

You can easily understand cloud computing from the history of personal computer software over the past decade. Ten years ago, a consumer purchasing a new computer would be extremely conscious of the machine’s processing power as well as the size of its random access memory (RAM) and its hard drive. This is because so much of what the consumer might wish to do would take place on the machine and by the machine itself. Any software would be installed onto the computer and accessed by the computer’s central processing unit (CPU) and operating system (OS). The amount of RAM available would determine how fast a program might run, and the total memory on the hard drive would determine what programs one could use.

Today, a corporation, small business, or individual no longer has to make nearly as many decisions when purchasing hardware; in many cases, there are no hardware decisions to make.

As the long-tenured venture capital firm Bessemer Venture Partners summarizes in its Top Ten Laws of Cloud Computing, the headaches that once plagued software providers and users have been relieved. Now, a software provider can bypass these challenges and simply make sure that a business or individual has all the data and applications necessary to succeed.

Some History and Evolution

Cloud computing was more or less created by the growth of consumer Internet. In 1999, there were roughly 50 million broadband users worldwide. In 2012, there were perhaps two billion. As consumers began to have increasing speed and access to the Internet at their leisure, they began to use the consumer web at extraordinary levels.

Then,  Google was born and grew into the behemoth that it is today, tasked with serving the millions and ultimately billions of consumers making trillions or quadrillions of searches. Many of the innovations we see now are a direct result of Google’s response to the Internet's rapid growth, and many are related to cloud computing. Other consumer web businesses have followed suit. Amazon, for example, became so adept at managing its own data centers and infrastructure that it began offering these skills to third party developers, as Amazon Web Services.

The same transition to cloud infrastructure is now happening in enterprise software. 

Tech firms caught on to this trend and began building similar services solely for enterprises. As a result, businesses no longer need to hire expensive IT consultants or staff to make complicated decisions about hardware or suites of software products. Instead, they have options.

They can make use of “public clouds” such as Dropbox, Box, and Citrix ShareFile, which are used by many other businesses. Or, if they are of sufficient size, they can build their own “private clouds” for security, governance, or other reasons.

As an additional advantage, businesses can keep data in storage owned by a third party, in a data center run by data specialists. This allows businesses to purchase computing and storage almost as they would utilities, on an as-needed basis, which gives them room to scale up or down at will.

As large enterprises continue to adopt cloud computing in all its forms, businesses will have to make critical decisions related to the security, storage, and virtualization of their software, proprietary information, and data. In the future, we expect to see more headlines related to changes in the existing ecosystem and the disruption of key incumbents, like HP and IBM.

What does this mean for VC investing?

The accessibility, utility, and popularity of cloud computing has created an industry shift ripe for disruptive technology innovators. The media continue to pump out headline stories about the role of cloud computing in enterprise software today, as well as the accompanying influx of venture capital in start-ups tackling the space. VCs across investment stages are maintaining a close watch on the sector’s success and growth potential, with the goal of identifying those companies most likely to drive compelling returns for investors. Cloud computing is still a nascent industry, and its potential spans across all industries.

Stay tuned for Part III of this four-part series, which will discuss the evolution of Software-as-a-Service (SaaS) and its impact on enterprise software.

Follow us @TrueBridgeCP for more updates.

Edited by Alanna Brock