Clear Skies Ahead: How to Successfully Invest in a Cloud Startup

The funding structure for startup companies in the tech space can be a little bit confusing for general investors – particularly when it comes to companies in the cloud computing arena, which need less upfront capital for hardware than some other tech sectors. Holleran sets the record straight, explaining that “in the cloud business application market, startups focused on mission critical business problems who want to be global category leaders will choose to leverage venture capital in the early stages of their company’s lifetime. When a cloud business application company achieves $50M or more of recurring revenue they should plan for an initial public offering.”

In particular, at Cloud Apps Capital Partners “we believe that all of our portfolio companies have the potential to be public category leading global businesses. As a result, our team invests wholly in the success of our portfolio companies whether an exit is an IPO or acquisition. There are situations where companies are strategic to a large acquirer and the company should evaluate that option as an alternative to being a public global market leader.”

Top tips for investing in early-stage cloud companies

When asked about the market’s top trends, Holleran stated that “we think this is now a global market, customers all over the world of all sizes want to use and buy cloud business applications. As a result, small companies need to serve the world much earlier in their lifecycle. Now that the world is coming online, market opportunities for cloud business application companies are growing.”

So which of these companies will see the most growth? Holleran counsels looking “for a hard problem, that groups of business users need for collaboration.” In his work at Cloud Apps Capital Partners, “we look for deep domain expertise in solving the problem and we help the companies to build world class executive teams. With the right problem, the right solution, and the right team great companies develop economic customer lifetime value metrics. These are the things that follow on venture investors look for in cloud business application companies, as do public market investors.”

Investing outlook for the coming year

All told, “the Cloud Business Application market is healthy, business users everywhere are getting online and the world is going global. For instance, Insightly a series C investment founded in 2009, services over 1 million users located in over 175 countries in 7 languages, as a global CRM leader for small and medium businesses.”

Holleran predicts that “this trend will continue to grow as cloud business application companies leverage platforms and partner ecosystems like the Salesforce Platform (NYSE:CRM) and Appexchange, Google Cloud Platform (NASDAQ:GOOGL), AWS, Microsoft (NASDAQ:MSFT) and more. We expect to see more innovation, from more places in the world with more hard big business problems being solved in the cloud. The cloud business application market is healthy, the subscription model has been proven, and complicated enterprise problems are moving to the cloud.” All told, it’s a great space for early-stage investors to be in.