ANALYSIS: STORAGE START-UPs IN 2010

In 2010, we counted 52 investment rounds initiated by storage start-ups against 49 in 2009 and also 49 in 2008, far from the record of 76 in 2004 and 2005. But this small growth last year is good news for storage, still one of the most dynamic sectors in the IT industry, remaining a sector appreciated by VCs that dream of what some of them got following the acquisitions at huge prices of firms like 3par and Isilon.

But these later investors are lucky and generally most of them have to invest in several start-ups to finally win the jackpot.

NUMBER OF FINANCIAL ROUNDS
         

(Source: StorageNewsLetter)

Fewer and fewer start-ups
More worrying is the increasingly reduced number of start-ups founded since the heydeys of 2000 when 94 new entities sprang up in a single year. We were only able to turn up four new firms launched last year. While this figure may go up as more of these, operating in stealth mode, come to light. But there is a good chance to see this number growing this year as several mid-range storage firms have been acquired. Generally, after these deals, you see some executives fired and trying to come back with new ideas to found another start-up. More acquisitions, more start-ups to come.

 NUMBER OF STORAGE START-UPS
LAUNCHED EACH YEAR SINCE 1996
             
   (Source: StorageNewsLetter)

                               NEW START-UPS (known thus far)
                                            BORN IN 2009


                                                 BORN IN 2010

  (Source: StorageNewsLetter)

How much do they raise?
Nine firms raised more than $20 million in 2010 with a record $45 million for Fusion-io, in exciting SSD technology, followed by Coraid with $35 million corresponding to two rounds during the year. Only two firms got more than $20 million in 2009. That year the same Fusion-io was also the leader with $45 million, bringing now its total at no less than $111.5 million.

THE GREATEST FINANCIAL ROUNDS IN 2010
              (more than $20 million)
                    
(in US$ millions)
           

             * in two rounds
            
(Source: StorageNewsLetter)

No one came close, however, to beating the all-time record set by now-defunct HDD maker Cornice, which raised a whopping $95 million in one round in 2005, following an early $45 million round one year prior, getting finally $178 million totally lost by its founders and investors.

If we take into account here the total funding of start-ups still running, all rounds aggregated, Pillar remains the most financed start-up, with $350 million from Oracle’s CEO Larry Ellison, via Tako Investments. After that comes BlueArc with $224 million.

Just one IPO since 2008
In 2007, the main event was the long-awaited return of the U.S. stock market’s interest in storage start-ups with six IPOs registered. That did not last long, however. Then there was one operation of this sort posted in 2008, involving start-up Rackspace Hostings, based in San Antonio, TX, which offers hosting services both for servers and storage in eight data centers worldwide. Since then, the only start-up entering on the stock exchange was OCZ Technology, in RAM and SSD, even if some others tried public offering like Nexsan and GlassHouse twice.

            IPOs IN THE STORAGE INDUSTRY

  * in US$ millions
  ** became public via a merger with Network Peripherals
  (Source: StorageNewsLetter)

We could possibly envision a few companies who might risk a public offering, with names that come to mind like DataDirect Networks or once more GlassHouse and Nexsan. On the other side, one firm, Seagate, tried to get private  – for a second time – but failed.

For storage start-ups, there are finally very small chances to be public. The real possibility for the founders and investors is to find a big buyer.

Where from?
It will come as a surprise to no one that storage start-ups are for the most part (more than three-fourths of the total) headquartered in the U.S., even if occasionally the actual founders hail from another country originally (typically Israel). Far behind are France and UK with 14 start-ups, then Canada and Israel with 10. Apart America and Europe, the two other continents, Asia and Oceania, are not well represented at all.

WHICH COUNTRIES DO THEY COME FROM?
         (out of 332 active start-ups)
                 
       
(Source: StorageNewsLetter)

Where are they going?
The last thing we looked at was what becomes of all these storage start-ups after we identify and count them? The conclusion is not really reassuring, a reminder that investment in these sorts of companies is in fact highly risky. And that’s just taking those we know about.

Only 3% eventually go public, and thus allow investors more than just to recoup their original stake. The same is generally true for the 26% that find buyers, although the asking price is not always greater than the total of all sunk investments. It is, in any case, the emergency exit that most companies are seeking, certainly more than the increasingly elusive IPO. Meanwhile, another 19% just vanish off the map – doors closed.

More than half (53%) remain in a holding pattern, still a start-up, still nursing the secret hope of an offer from a storage giant seeking to fill-in a missing technology.

WHAT HAPPENED TO THEM SINCE 1978
          (out of a total 631 start-ups)
      
          (Source: StorageNewsLetter)

22 of them did find buyers in 2010, the biggest deals being $218 million for Mellanox to acquire Voltaire, and $140 million, the price paid by IBM for Storwize.

    START-UPs ACQUIRED IN 2010
             (price in US$ millions)

 Correction: Neterion was acquired by Exar, not Lexar.
 (Source: StorageNewsLetter)

                                FINANCIAL FUNDINGS IN 2010

                                FINANCIAL FUNDINGS IN 2010


  (Source: StorageNewsLetter)