Is Cloud Computing Security the Next Y2K Opportunity?

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Cloud computing is often hyped as a cool new technology and a near-cure-all; move all that complicated IT infrastructure to the cloud so your company can be more efficient and save money and space in the process.

Deloitte venture capitalist Mark Jensen strongly believes in cloud computing’s value proposition, but with some important caveats.

“The problem we’ve had with the cloud is that a lot of fundamental technologies related to security and privacy don’t exist yet; making sure you’re not compromising someone’s personal information,” Jensen, managing partner for Deloitte’s National Venture Capital Services group, told InternetNews.com. “All that’s still be developed. It’s not here now, but it’s coming and it’s going to be about as important to business as Y2K was.”

The infamous Y2K panic in the late 1990s because computer systems weren’t designed to process the year 2000 and beyond would crash during the date change. It led to a massive IT reinvestment in software and hardware. Jensen thinks cloud computing will benefit for far less disastrous reasons.

“Looking at Y2K from the positive side, it forced companies that had deferred investment to become more efficient by buying new systems,” he said. “With cloud computing, I think companies will be motivated purely for competitive reasons, because the efficiencies you’re going to see in the supply chain and the ability to more easily surface customer information are going to be huge opportunities. The companies that don’t get on board will be left behind.”

Jensen said he believes it will take three to five years for cloud services to emerge that are truly enterprise-ready from a security and privacy standpoint, but he hedges even that prediction.

“The one thing that could set all the progress back is a massive security breach or a situation where some company lost significant IP [intellectual property] and their competitive advantage. Also, looking globally, different countries have different privacy standards, so it’s all going to be a huge challenge,” he said.

“We have to solve these problems, because until you do you’ll never see mission critical software in the cloud, just the little stuff. But it’s coming. We’re working with companies every day on this stuff.”

While a number of cloud providers have already staked out significant positions (e.g. Amazon, Salesforce), Jensen there is plenty of opportunity for upstart firms to provide further value. He sees Amazon (NASDAQ: AMZN) as one of the companies that is setting the foundation for new cloud services.

“The cloud is many things: it’s Software as a Service (Salesforce, etc.); it’s Platform as a Service (PaaS); Storage as a Service and Infrastructure as a Service (LaaS) from big providers like Amazon,’ he said. “That foundation enables a lot of startups and smaller companies to build new services. What we’re seeing is a tremendous rise in software companies that take IT to a whole new level by letting companies buy computing services by the drink rather than having to buy the whole enchilada.”

Venture capital investment in IT

Jensen referred to the 2010 Global Venture Capital Survey released earlier this week by Deloitte and the National Venture Capital Association, to note that the VC industry continues to decline and contract. The downturn dates back to the dotcom bust earlier this decade and has lingered with the problems in the economy. Over 500 VC firms worldwide participated in the survey.

“I wouldn’t say there are fewer investments, just a change in the landscape with angel investors playing more of a role than traditional venture capitalists,” he said.

Clean tech, health care and new media/social networking were the three hottest areas of VC investment. Eighty percent of the survey respondents said they planned to increase their investment in clean tech, followed by health care (63 percent) and new media/social networking (56 percent).

Regarding clean tech, Jensen said he expects to see a lot more attention paid to how much energy it takes to produce things.

“The other low-hanging fruit is conservation and things like the smart grid and new battery technology where you store energy taken off the grid,” he said.

“The problem is that half the electricity we generate in this country is never used, so you want to modulate it or store it somewhere so that it won’t go to waste and it will be there when you need it,” he added.

Not invented here?

More than 90 percent of the VCs surveyed in the U.S. said they expect the number of venture companies to decrease between now and 2015, while a majority of VC firms in China, India and Brazil anticipate more venture capital firms being established in their countries. Europe and Canada expect less of a contraction in the number of VC firms than the U.S. respondents.

“This year’s survey results underscore the importance of market and political environments to the future of global venture capital ecosystems,” Mark Heesen, president of the National Venture Capital Association said in a statement.

“It comes as no surprise that optimism abounds in geographies where venture investment is well supported by sound public policies, stable capital markets and entrepreneurial energy,” he continued. “Yet, it is ironic that the more optimistic environments are now outside the United States.”

David Needle is the West Coast bureau chief at InternetNews.com, the news service of Internet.com, the network for technology professionals.