VCs reach for the cloud

A new trend is emerging in how venture capital firms invest in UK technology. While the rest of Europe remains largely indifferent to the "cloud-based" phenomenon, UK players have begun sifting through the country's new technology start-ups to nurture the ones that are offering the next big thing in cloud computing services.

Abiquo, Conversocial and SocialBro are just a few of the UK-based cloud computing companies that have recently received substantial backing from venture capital firms.

"The cloud is definitely a big revelation," says Stuart Paterson, a partner at Scottish Equity Partners, which last month led a £1.2m investment in London-based SocialBro, a cloud-based Twitter analytics tool for businesses. "It's a growing trend. Everyone's moving towards the cloud and software-as-a-service, versus the more traditional, on-premise delivery models for software applications. It's definitely a very attractive space to be in because of its high-gross margins, predictable earnings and the fact that it can be highly cash generative. Even private equity is moving in, once a business reaches a sufficient scale. And there are some cloud computing businesses that are extremely profitable and going very far."

Cloud computing has gained traction with impressive speed. While its definition may not yet be securely set in stone, the overall concept centres around the use of the internet – or "the cloud" – as a place to host publicly-accessible software and data.

Head in the clouds
Cloud computing encompasses internet-based applications that are hosted on a server, which has been made available to access over the web. A limitless number of users can connect their machines – which can include PCs, tablets and smartphones – to this server in order to access the hosted application. Cloud-based software allows a user access without the need to install and maintain desktop software. It also offers multi-synchronisation, allowing a user to access the software's content on any number of devices.

Its convenience is what makes companies that are exploiting this new form of online infrastructure so appealing to customers – and therefore to venture capital firms.

"There are aspects around the business model that are very attractive to venture capitalists," Paterson explains. "You're using the internet to distribute your product so it's highly scalable, you're using the cloud so it's low-cost and often someone else's capex – and therefore the internal cost to serve the customers is low so it's capital-efficient.

"The key thing, though, is what the application or service being delivered by the business actually is. We really like the fundamentals of cloud computing, but it very much depends on what the business is actually doing – how is it growing and competing? What industry is it serving? Is that an attractive space to be in? That's the deciding factor," says Paterson.

Cloud computing can be implemented through a number of models, the most popular being infrastructure-as-a-service (IaaS), software-as-a-service (SaaS), platform-as-a-service (PaaS) and network-as-a-service (NaaS).

A rising number of young tech companies are offering their business as SaaS or PaaS models. The advantages for doing so are becoming increasingly apparent. Lower costs, less maintenance, far greater potential and an endless space to fill have made cloud-based services an appealing choice for both companies and investors.

"Anything that reduces the cost associated with doing business is going to be beneficial to entrepreneurs, and that's clearly something that cloud-based services do," says Alex Macpherson, head of the ventures team at Octopus Investments, which recently led the £2.95m funding round for Conversocial, a social customer service software business. "The cloud enables companies to deliver their services more cheaply and efficiently. Ultimately, it's all about how you can improve the service to your customer base, and that can often be achieved by using cloud-based services."

Every cloud's silicon lining
Like Octopus and SEP, a number of venture capital firms are now honing in on the UK's new cloud-based technology scene. And while it will be a long time before East London's increasingly noticeable Tech City is on par with its US older sibling, Silicon Valley, in terms of venture capital activity in the sector, the country is certainly making a name for itself in cloud computing.

"The eco-system here is becoming a magnet for entrepreneurs and talent," notes Macpherson. "What you're seeing now in the UK is a thriving enterprise sector supported by great government initiatives, such as Tech City, and more established initiatives like venture capital trusts and enterprise investment schemes, which encourage investment into smaller companies enabling investors to access and support enterprise in the UK while benefiting from the tax reliefs associated to these investments. We're also seeing a growth in entrepreneurship in our universities and business schools. All of this, along with the rise of the serial entrepreneur, is creating a really exciting environment for enterprise."

Companies founded by these young entrepreneurs like import.io, a cloud-based, big-data platform provider that recently raised £600,000 from Wellington Partners, SEP's SocialBro and Octopus's Conversocial are reaping the rewards of using cloud computing as the root of their products, thanks to the UK venture capital scene's drive to invest in emerging technologies.

"I think it would actually be much harder to raise money as a non-cloud company than a cloud company," argues Conversocial CEO and co-founder Josh March. "Cloud computing fits the criteria of venture capital firms far more than traditional enterprise software. You can develop your product much more rapidly with cloud software, which is essential in today's market. Everything is changing and updating so quickly."

The wealth of business opportunities that are emerging from the UK's cloud computing scene are only just beginning to be explored, but already the sector looks set to quickly become a firm favourite among the country's venture capital players. While consumers begin to overcome their fears of the security risks associated with cloud computing – due to the fact that users' data is stored online – the entrepreneurs and investors on the scene are embracing the shift to the cloud.

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