Over the past few years, SASI has met with numerous startups and we have seen a movement towards the capital efficient start-up. In short, we are seeing startups doing more with less capital and exploring earlier exits through M&A. While there is no shortage of large rounds being raised by companies that are “swinging for the fences”, there is also a number of startups that are developing disruptive technologies and gaining initial customers with invested capital in the single-digit millions. While some of these companies may step up and do a significant later round, others will likely exit through M&A, providing a healthy return to the investors. Specifically, we see this trend in storage related startups that are targeting well-defined markets with specific areas ripe for disruption. These markets tend to have a few, well-capitalized competitors with significant channel/brand power and customer control/lock-in. For these capital efficient startups it is often a question of the additional risk and related ROI tied to spending significant capital on sales, marketing and channel development vs. remaining mainly focused on product development and initial customer evaluations. We see this new type of “Small Ball Venture” existing alongside the current venture model. From another perspective, one could argue that this new model is really a throwback to the early days of venture investing before the mega funds.
There is no easy answer to this question but our sense is that there are certain segments that appear to be over funded with valuations and corresponding expectations at record highs. Top of mind is the solid state/flash sector which covers a broad array of pure flash system companies, hybrid players and sub-system players. While there are likely to be multiple “winners” in each sub-sector, we are not seeing significant differentiation in some of the start-ups. On the other hand, multiple start-ups such as Actifio, Nexenta, Violin, Nimble Storage and others are claiming significant customer wins and revenue growth. These and other late stage start-ups could see solid exits through M&A and IPOs later this year or in 2014. The cause for concern is the next batch of start-ups that are arriving late to the game with “modest differentiation” vs. “game changing” or truly disruptive technology. We are on the cusp of a truly transformational time for storage with new software defined approaches posing real threats to the incumbents and converged architectures that render storage as a discreet market, “old school” and a thing of the past. Hence, this wave of disruption is already occurring and one of the main risks we see in venture is paddling in too late.
SASI led the negotiations of the letter of intent through the definitive agreement. SASI was also involved in negotiating key employment terms and other critical post-acquisition matters. Keys to success included evaluating the strategic options facing the client, understanding the unique dynamics and sensitivities on both sides of the transaction and running an efficient due diligence process.
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