Software-defined Everything

Software defined networking (SDN) made a big splash back in July of 2012 with VMware’s $1.26B acquisition of Nicera and again at The Gartner Data Center Summit and The 451 Storage Executive Event in Q4 2013.  Software defined storage (SDS) has become the hot marketing phrase with many start-ups claiming SDS market leadership. More recently, I have heard the terms software defined data center, software defined infrastructure and even software defined power. SDS has even made it onto the Gartner hype cycle for storage related technologies.

SASI Perspective on SDS:

The buzz around SDS is only matched by the confusion of what it is and what it offers IT users. The typical example given for SDS is some flavor of storage software with de-dupe, compression, a file system and various storage services all running on commodity hardware. There are actually a number of interesting companies thrown into the SDS space but I am unsure that using the SDS term really adds value and may even raise problems with market understanding and penetration. As an example, the value proposition of offering scale out storage software on commodity hardware that offers much lower cost than legacy systems resonated well at both events. Stated another way, end users like the notion of Amazon and Google scale and cost models for their own businesses. Adding a the new term “SDS” added little to the conversation and questions quickly turned back to who could provide this new storage software and how it could be integrated into their IT roadmaps. The software defined terms may be around for some time but I would rather hear more about real IT pain points being solved with great enabling technology and how, at the end of the day, it offers cost savings with possibly some analytics, which could even help the topline. Lastly, in terms of Gartner adding SDS to the storage hype cycle, they would be better served by focusing on core technologies like object storage and next generation distributed file systems.

Q2 2013 Storage Highlights

Q2 M&A dropped to a total of 5 transaction from 9 in Q1 but total consideration rose significantly to $659M, driven by Western Digital’s acquisition of STEC for $340M.  While the STEC deal was certainly not a “big surprise”, it does bring further consolidation to the SSD space and may be a precursor to projected consolidation in the solid state systems space. Other notable transactions include EMC’s purchase of ScaleIO for an estimated $200M and Fusion-io purchase of NexGen Storage for $119M.  ScaleIO brings EMC a new software platform for scale-out SAN while NexGen brings Fusion-io further into the systems business.   Total M&A for the first half totaled 14 deals with roughly $1B in consideration, which is on-track with our forecast of $2B for all of 2013.  Storage related venture funding keeps up solid momentum with $135.5M across 14 rounds with an average of $11.3M per round.  Smaller and later rounds of funding led the quarter with the exceptions being Panzura, Atlantis and PernixData securing larger rounds of $25M, $20M, and $20M respectively.  We also had a first round of funding for Reduxio, a provider of hybrid SSD solutions.  Our venture forecast of $700M for 2013 is looking good with $368M invested in the first half of 2013 through 28 rounds of funding.

The Capital Efficent Start-Up

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.