Cloud, storage, and venture capital opportunities
Posted Monday, January 10, 2011 in Software Business 2 comments
The folks at VC Journal asked me to share some thoughts on investment opportunities in the cloud. Given the recent large VC returns in the "cloud storage" space (I use the term loosely), I thought it might make sense to look at the topic from that point of view. Unless you're a VC with a subscription to VC Journal, you won't be able to read it on their site, so I'm pasting what I submitted below. Curious to hear your feedback.
The future of cloud storage venture investments
Storage sure looks sexy to venture investors these days. The acquisitions of 3PAR (HP), Isilon (EMC) and Compellent (Dell) add up to more than $5.5 billion. All three were storage hardware companies of the same vintage, about a decade old, and big wins for their VC investors. Looks like virtualization and cloud storage are the places to invest, no? Well, I sure think so, and placed a huge personal bet three years ago by starting a company precisely aimed at these markets.
It’s interesting to note that all three deals were partially justified by acquirors, financial analysts and pundits as plays in the new virtualized, cloud data center. Yet the core technologies touted to justify lofty valuations were developed before the emergence of virtualization let alone cloud computing.
When they were founded, none of these three storage companies were designing for a world of virtualized clouds. None of them redesigned their products from the ground up for these new markets. They did change their marketing messages, to be sure. With this repositioning, they achieved cachet, and I cheer for their successfully grabbing the brass ring.
As a venture investor, the question is what storage plays will pay off 5-10 years hence, when virtualization and cloud become mainstream?
3PAR + Isilon + Compellent = Game Over?
Will the new owners of 3PAR, Isilon, and Compellent take all of the market, in which case new startups needn’t apply? History and technology trends suggest not. There are plenty of technical obstacles yet to be solved in this space. Proprietary hardware systems architected ten years ago, now captured by giants who inherently aren’t as innovative as startups, aren’t likely to be the ultimate answers.
One thing is certain: cloud computing and virtualization are fundamentally different. It is clear that new approaches to storage are going to be game changers in enterprise and cloud virtual computing. It’s a very good bet that the big winners a few years from now will emerge from a whole new generation of startups.
VCs who drive by rearview mirror bewilder me. Why make investments that won’t become liquid for years based on today’s hot exits? Will the next big plays in storage for the virtual cloud be 3PAR part deux – more monolithic, proprietary storage hardware?
There will surely be more significant storage exits as the cloud and virtualization markets develop. What is not so obvious is that they will be proprietary hardware plays.
In the computer business, value has migrated from hardware to software. Storage has lagged in this regard by a decade or so, but the transition is tangible. That’s why my bet in the next generation storage market is on software.
Comments
Andrey Kuzmin 1:17pm PST on January 11th, 2011
> Proprietary hardware systems architected ten years ago, now captured by giants…
Um. To my understanding, none of the three companies mentioned is a “proprietary hardware platform”, but rather proprietary software running on commodity hardware.
Mark Davis 6:58pm PST on January 11th, 2011
Andrey, thanks for your comment.
Is the hardware in an Isilon (for example; I’ll pick on them since you used to work there) box a commodity? It depends on your definition of the word “commodity” and your vantage point. If you define “commodity” as “an industry standard part that is the same as widely used in other devices in the computing industry”, then the answer is yes. If you are Isilon deciding from what source to buy memory chips to stuff in your boxes, and there are multiple choices with exactly the same specifications available, then the answer is yes.
Lots of people in the computer industry use the term “commodity” in these ways. However, those are misuses of the word.
Quoting Wikipedia, “a commodity is fungible, that is, equivalent no matter who produces it.” (I’m using here the definition generally accepted in economics, rather than the term as used by Karl Marx.) A product available from only one source is, by definition, not a commodity.
From how many sources can one buy memory for their Isilon boxes? The answer is, only one: Isilon. As the end user, you have no choice. Even if you could get exactly the same parts from exactly the same place as Isilon buys them, you can’t stuff them into your disk array without voiding your warranty, software license, maintenance agreement, and perhaps even your birth certificate.
You can get parts for your Isilon, 3PAR or Compellent hardware only from the original manufacturer. That, from the point of view of the end user, is exactly the opposite of a commodity: it is fully proprietary.
This is of course the economic magic of the storage hardware business. Manufacturers buy what are to them commodity parts (memory, processors, disk drives, et cetera) and package them in a way that makes them proprietary to the end user. The manufacturer reaps the benefits of commodity economics in their purchasing, but does not fully pass those benefits on to their customers. Neat economic trick, huh?
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