The Perils of Storage Start-ups

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It seems that every day brings a new storage start-up boasting of great technology, hoping to compete against the likes of EMC and other storage giants.

The market can’t possibly be big enough for all of them, can it?

It can’t.

A new report by early-stage venture capital firm Crescendo Ventures looked at 456 storage ventures over 34 years and found that 70% of them failed. And
the 30% that made it delivered only 60% of the return needed to meet the venture community’s return objective.

The results of the study will be of interest to the current crop of storage start-ups and their backers. More than $3 billion in venture funds has been invested in more than 150 start-ups in the last three years, and more than 75% of them remain private, according to Crescendo.

The report outlines a number of qualities that can enhance a start-up’s chance of success.

For starters, capital efficiency is an important one. “By ensuring that a company’s capital requirements develop in line with the normal range for projects within a specific storage sub-sector, investors and entrepreneurs can make sure they are building businesses based on assumptions that will allow them to achieve a positive return if the company is commercially successful,” the report says. Spending more than is appropriate does not improve a start-up’s chance of success, the firm reports.

Companies whose technology is considered “disruptive” – defined in the report as low-end/low-cost, a profitable business model, new distribution chain, and lack of participation from existing market leaders – were more likely to be acquired prematurely by established competitors eager to eliminate a threat. Acquisitions of storage start-ups in general appear to be product- and knowledge-driven instead of based on proven customer demand,
Crescendo found.

Technical founders with prior experience in the delivery of commercial products to new markets are vital for creating technically superior products, and are more important than marketing and administrative founders. A proven business development executive is also critical – but not in the first 1-3 three years of technical development.

It can take 10-15 years for new storage technologies to be adopted, and failure to craft commercial plans accordingly has been a leading contributor to start-up failures, Crescendo says.

Tape companies have been most successful, with 56% achieving exits, while services companies were the least successful, with only 17% merging or going public.

Market Opportunities Identified

The study identifies a number of promising areas and trends that could drive start-up opportunities.

A shift from hardware to software and services and from the high-end to the mid-market are two such trends.

The decline in cost per megabyte of storage will accelerate for disk subsystems, aided by the introduction of enterprise-class SATA disk drives, and will drive more nearline storage dollars from tape to disk, according to the venture company.

Linux is gaining market share, and the increasing penetration of clustered Linux into mainstream data centers will drive growth in storage management software for Linux.

Consolidation of storage infrastructure through networking will continue to take share from direct-attached storage, and IP-based storage networking is expected to take an increased share of the storage networking market, the report says.

Backup, data protection, and data availability are critical, but such functions also remain highly proprietary and expensive, creating opportunity for open storage management platforms.

IP SANs, system area networking, open systems modular storage architectures, and automated, application-aware data storage management are potential areas
for investment.

Crescendo Ventures has been active in early-stage storage investing since the mid-1990s. Its storage investments include Xiotech (acquired by Seagate), Entera (acquired by Cacheflow), NuSpeed (acquired by Cisco), Compellent, Sistina, StoneFly, and others.

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