IaaS funding resurfaces as SingleHop raises $27.5M

In a cloud computing market dominated by large, well-known companies such as Amazon Web Services (s amzn) and Rackspace (s rax), it’s difficult to find much upside investing in the competition. However, Battery Ventures has done just that, leading a $27.5 million round in SingleHop, a Chicago-based infrastructure-as-a-service provider.

The challenges in IaaS are pretty clear: it’s expensive to buy and operate the necessary gear, it’s difficult to build a differentiated platform and, perhaps most importantly, there’s the little challenge of standing out against IaaS heavyweights. AWS, Rackspace, Terremark (s vz),  and VMware (s vmw). These are not small companies, and AWS, in particular, maintains a commanding lead in market share and mindshare.

But according to Dave Tabors, a partner at Battery and now member of the SingleHop board, IaaS “is as much an execution game as it is a technology,” and SingleHop has been executing. (Not that SingleHop’s technology is bad. It actually resembles SoftLayer — another up-and-coming IaaS provider that’s making a name for itself with some big-name customers — because of its single, automated platform that delivers both dedicated and cloud servers.) Tabors told me Battery spent the better part of four years researching the IaaS space before deciding that SingleHop presented the best investment opportunity around.

SingleHop now manages 10,000 servers across two Chicago data centers, with a third to come in Phoenix. Inc. Magazine named SingleHop the No. 25 fastest-growing U.S. company in 2011. And, most importantly, it’s making customers happy thanks to features such as its Customer Bill of Rights. With Battery’s backing, Tabors thinks SingleHop can scale its business to the next level.

It’s worth watching to see whether other VCs also still have an appetite for IaaS, and where they’ll decide to invest if they do. Thought leaders Joyent and Virtustream have raised piles of money in the past couple years (to the tune of $107 million and $50.4 $75 million, respectively), but IaaS investment has otherwise been rather slow. Promising startups are difficult to come by, and some more-established privately held providers might not be seeking venture financing.

Maybe the topic will come up during the VC panel at our Structure conference in June, during which leading investors will talk about what has them excited in the cloud. The cloud keeps evolving, but its IaaS foundation will always be important. The question is how much opportunity investors see to get a piece of IaaS providers that can actually deliver a big return.