The big fear about the data center market has always been that a flood of new facilities would lead to a repeat of the oversupply that marked the data center glut of 2002-03. This burst of speculative construction has never materialized, as the data center industry is a capital-intensive business with a high barrier to entry, which has become even higher as the credit crunch has made it harder to fund new construction.
Here’s one more data point on the supply and demand situation that emerged from last week’s GigaOm Structure 08 conference: don’t expect the venture capital industry to directly fund new data centers anytime soon. An afternoon panel of venture capitalists focused on the lack on investment in Internet infrastructure. The VCs argued that they were funding infrastructure, just not servers and data centers – which Vivek Mehra, General Partner of August Capital, noted are “very, very expensive.”
Maha Ibrahim, General Partner in Canaan Partners, pointed to the data center glut as a cautionary tale. “In 2002 all these data center (companies) were blowing up,” Ibrahim said. “It was a horrible business to be in.
“We have to avoid the capital-intensive service providers,” she added. “In most cases, those aren’t venture investments. We’re looking for things that are really revolutionary, rather than those that can be funded by anyone with a checkbook.”
Kara Swisher at BoomTown noted the title of the panel: Eyes Wide Shut: Why is the VC Community Keeping Its Wallet Shut to Infrastructure? “Why? Because they’re giving all that stupid money to widget companies,” Kara observes in her video, a reference to the huge valuations for Slide and RockYou, which make widgets for social networks like Facebook and MySpace.
Even if venture capitalists don’t invest directly in servers and data centers, those dollars often make their way to companies in the sector. Both Slide and RockYou have bought content distribution services from Akamai (AKAM), while CDN providers have received more than $282 million in venture funding over the past 12 months. Many of those CDNs have used that money to expand their network infrastructure.