Virtualization ‘versus’ cloud: is there even a versus?

If 2008 weren’t enough already, buzz around cloud computing startups is reaching deafening levels this year. On the one hand, large enterprises are taking the opportunity to reduce capital expenditure during the ongoing economic disruption. On the other hand, as abstract thinking around cloud computing crystallizes into concrete action, more and more startups leading with a cloud computing message are coming out of the woodwork.

Longworth follows a research-based approach to early-stage technology investing, where we form market maps and investment theses for particular market segments as we investigate them for startup opportunities. For most of last year, we put qualified investment opportunities with a ‘cloudy’ pitch in the same bucket as our those with a pitch around virtualization. There was a lot of messaging overlap last year between the two areas to be sure, because virtualization projects were being rolled out in a number of enterprises, and the ultimate goal of several of these projects was to build a private cloud. Fundamentally though, cloud computing, while being enabled by virtualization, is a separate area of investigation in our investment research (I had been doing some thinking about cloud computing at my previous gig).

Photo Credit: Steven Pinker

In 2009, cloud is finally (and naturally) breaking out from virtualization and coming into its own as a distinct segment within our startup tracking processes. Because we’re actively investing from our recently-closed third fund, I’m going down the list of companies we used to track as virtualization startups and in some cases, reclassifying them as cloud computing startups. This reclassification has been an illuminating exercise in itself because I’ve had to articulate why I am moving startups from one list to another. Much like this (somewhat tongue-in-cheek) list of what can’t be cloud computing, here are some cues I used during this reclassification:

• Pitch. Does the company mention ‘virtualization’ at all in its primary value proposition, aka pitch? If yes, then its offering is virtualization-focused rather than cloud-focused, although it may be an enabler for an enterprise cloud. Note that I don’t automatically classify companies that mention ‘cloud’ as cloud computing companies because even a lot of virtualization-focused startups will use cloud to gussy up their pitches.
• Buyer Profile. Can a tech-savvy individual contributor within an organization at a departmental level ostensibly get started with the company’s offering, or does centralized IT need to get involved? The former would qualify as a startup with a cloud computing offering.
• Purchase Method. Does a customer have to undergo a traditional enterprise software purchase process, with purchase orders and heavy-touch, potentially lengthy sales engagements, or can they whip out a credit card and get set up in less than an hour? The latter would qualify as a startup with a cloud computing offering.
• Cloud Economics. Does the offering adhere to cloud economics, i.e. ‘pay-for-what-you-use’, even if it isn’t pay-as-you-go spot pricing? Does it include agile system provisioning as well as de-provisioning? If not, then the startup doesn’t qualify as a cloud computing vendor.

Not all of these cues cleanly demarcate the cloud startups from the virtualization startups. Sometimes I’ve had to use my own judgment, but the cues above do push me closer to an answer. 

No doubt I’ll continue to discover other cues as I proceed down our list of startups. To entrepreneurs and others in the know reading this, are there any big ones I missed? If you’d like to suggest some, please join the conversation in the comments.