What Happened to Data Storage?
• 1960’s – Innovation• 1970’s – Expansion• 1980’s – Standardization• 1990’s – Commoditization• 2000’s – Consolidation• 2010’s - ???
The Innovators Dilemma, Clayton Christensen, compares storage companies to fruit flies.
http://www.businessweek.com/chapter/christensen.htm
Commoditization
• http://isic.ucsd.edu/papers/EditorialINSIGHT32000.pdf – March 2000 Hard disk drives treated as an
undifferentiated commodity. Roger E. Bohn
• Can you buy it at Fry’s?– then its probably a commodity
Data Generation (2002)• Print, film, magnetic, and optical storage media produced about 5
exabytes of new information in 2002. Ninety-two percent of the new information was stored on magnetic media, mostly in hard disks.
• Telephone calls worldwide – on both landlines and mobile phones – contained 17.3 exabytes of new information if stored in digital form; this represents 98% of the total of all information transmitted in electronic information flows, most of it person to person.
• P2P file exchange on the Internet is growing rapidly. Seven percent of users provide files for sharing,while 93% of P2P users only download files. The largest files exchanged are video files larger than 100 MB, but the most frequently exchanged files contain music (MP3 files).
• The United States produces about 40% of the world's new stored information, including 33% of the world's new printed information, 30% of the world's new film titles, 40% of the world's information stored on optical media, and about 50% of the information stored on magnetic media.
Challengers to Magnetic Disk
• Magnetic Drum (1966)• Bubble Memory (1978)• Optical Disk (1982)• Flash Memory (1986)• Holographic Storage (1992)• Micro-Mechanical Machines (1998)
Most successful challenger to date:Smaller, faster, cheaper Magnetic Disk Storage
What’s hot
• Infiniband
• Gigabit Ethernet
• Storage Security
• Continuous Data Protection
• Storage Management Software
What’s not
• ATA RAID (does it actually work?)• Tape replacements
– FibreChannel Connection– ATA RAID– Tape emulation
• Small Network Attached Storage Devices– Anthology went belly-up
• Clustering File Systems– Too slow for anyone to take seriously
Information Sources
• http://isic.ucsd.edu/papers/index.shtml
• http://www2.sims.berkeley.edu/research/projects/how-much-info-2003/printable_report.pdf
• http://www.claytonchristensen.com/publications.html • http://www.ssrc.ucsc.edu/• http://www.magneticdiskheritagecenter.org/
Pssst – Want to do a Startup?
• Process of Founding a company
• Seed/Angel round investing
• Institutional investing
• VC terms
• Great books to read for more info
• My idea of what matters and what does not
My Background• Four Startups
– Scientific MicroSystems – IPO in 1986
– I/O XEL – Acquired by Peer Protocols in 1992
– Corosoft – Acquired by BMC in 2004
– BookRenter – in early stage 2006
• New business ventures – Quantum - Network Storage program
– Western Digital – Switched Fabric Storage
• Advisor and board member of several startups
• Consultant
Types of Startups
• Business A– Great Idea, Great Team– $1M Capital– 1 or 2 customers– 5 years to profitability
• Business B– Great Idea, Good Team– $5M Capital– 1 customer– 3 years to profitability
• Business C– Good Idea, Decent
Team– Bootstrapped– 5 Customers– Instantly profitable
• Business D– No Idea, Stellar Team– $20M Capital– No Customers– Profitability?
Where does one start?
• What is my idea worth?
• Is it a business or a product?
• Can it become a product or service?
• What would a business based on my idea be worth?
• How do I convince others of the value?
The Compelling Business Plan
• Need not be technical• Arouses a sense of gripping success and need
– “Pretty in recovery” fashions for mastectomy patients– Full service, at home pharmacy for geriatrics– Off-the-shelf hardware and secret sauce software that
allows parental access control of the internet
• Forget the better mousetrap– Better, faster, cheaper is not a sustainable business– The “me-toos” tend to die young
• Be able to speak to margins, profitability, competitors
Lifecycle of a startup• Seed Phase $100K• “A” round $1M• “B” round $10M• “C” or mezzanine round (optional)• IPO or acquisition $100M
VCs invest by committing capital, and reserves for future rounds, from their current fund
Non-starters• We have a great idea – the product will sell
itself• This business will be acquired, so there is no
reason to build a sales and marketing team• Businesses think they are VCs
– Let’s incubate the business inside a Fortune500 company and spin it out
– Let’s make a small bet and ask our customers what they think
– Let’s develop some Intellectual Property and have a VC match it
• Service organizations are expensive, let’s leave that out
How does one become a founder?• Decide who else will found the company
– Basic rule: founders do not get paid– Contractors, consultants, friends are not founders– Family members are not founders, but often invest
• Create a corporation and authorize 40-50M shares• Select board members and chairman• Value the Intellectual Property (IP) and business
plan• Contribute the IP and plan in exchange for stock
Example: Sheila and Jim found Newco. Sheila works 18 months on a business plan and Jim works 12 on technology. They value their total contribution at $500K and Sheila takes 3M and Jim takes 2M shares of common stock. At this point, the founders own 100% of the company – Sheila 60% and Jim 40%
Who should I invite to the party?
• People with startup experience
• People known to the investors
• People who can do the job• People that can handle
stress• People that you trust
Many people think they belong in a startupmost do not
What is a seed or angel round?• Opportunity for “friends and family”
investors• Investment based on trust of team• Investors and Founders agree on
valuation• Investors contribute capital and receive
stock• Hire employees, develop a product and
attract customers
Example: Newco raises $1M from friends and family and distributes 10M shares of stock. Newco is now valued at $1.5M with 15M shares of stock outstanding. Sheila and Jim have been diluted from 60% and 40% equity to 20% and 13.3%.
What is an institutional round?• Led by a professional Venture Capitalist• Often syndicated to other VCs• VCs, founders and previous investors
agree on valuation– Comparable M&A activity, IPOs– Discounted Cash Flows– Black & Scholes– Dartboard
• Investment based upon market opportunity, customer traction and exit strategy
• Grow the businessExample: Newco raises $5M from Sand Hill
VC and distributes 10M shares of stock. Newco is now valued at $7.5M pre-money and $12.5M post-money with 25M shares of stock outstanding. The VCs own 40%, Friends&Family own 40%, Sheila owns 12% and Jim owns 8% of total equity
What is preferred stock?• Votes as a class• Preference rights
– Liquidity– Anti-dilution– Pro-rata
• Reduces value of common stock and lowers option prices
• VCs only deal in preferred stock
What is a Liquidity event?• Equity converts into cash after a:
– Merger– Acquisition– Public Offering
Cisco buys Newco for $125M• Sheila gets $15M• Jim gets $10M• VC gets $50M (10x return)• Friends and Family get $50M (50x return!)
VC talk• Cram down – down round that results in reverse split• Carve out – additional stock set aside for valued execs• Founder stock – common shares created in exchange
for founder contribution prior to external investment• Founder options – no such thing, although headhunters
disagree• Bridge – loan of capital that converts to preferred stock
at close of next round• Pre-money – valuation before a round closes• Post-money – valuation after a round closes
= Pre-money + new capital• Hair cut – deal so great everyone wants in
so each investor gets less (i.e. good old days)• Pre-bubble – before 1999
What do VC’s look for
• 10x return on money in under 5 years
• Customers and revenue
• Skilled management team
• Competitive differentiation
• Partners and channels• Interesting and unique
technology - NOT
Valuation• What will the business be worth in
five years?• What is the Net Present Value
in today’s dollars?• Fischer Black and Myron Scholes
– Developed “the formula” in 1973
– Aka Risk Neutral Valuation
– Takes into account interest rate, volatility, future value potential
– Originally used to price options
– Awarded a Nobel prize in 1997– http://www.riskglossary.com/articles/black_scholes_1973.htm– Analysis of Asset Allocation - Black and Scholes calculator
• VCs get more with a low valuation
Issues• Employees want to be founders
– They can’t, so give them stock options– Reserve about 30% equity for employee incentive
plan• Dilutes everyone with no added capital• Consequently, the price of stock drops• Figure 8-10% for CEO, 3-5% per VP, 1% per director
• VCs unwilling to invest– Do you actually have a business?– Then get money from other means (loan, f&f)
Good Places to waste capital
• Expensive office space • Legal fees• Marketing consultants• Human Resources• Trade shows• Sponsorship• Travel• Bonuses
Good Places to invest capital
• Buy used furniture and IT equipment• Develop an Intellectual Property plan• Create partner programs that lead to
distribution• Buy relevant market research studies
(Gartner, Forrester, the451)• Hire consultants with specialized and timely
skills, like technical writers and QA/Test
Spend money and read these books
The Innovator’s Dilemma – Clayton
Christiansen
The Northbound Train - Karl Albrecht
Crossing the Chasm – Geoffrey Moore
Rules for Revolutionaries – Guy Kawasaki
Tricks of the Trade
• Get introduced to the Venture Capital firms• No more than board member for each VC and
avoid adding more than two per round• Warning: VCs will bill-back (charge) for their due
diligance in preparation of funding a startup• Use stock options for underpaid employees• Sell stock warrants for services:
– Consultants– Attorneys– Vendors– Landlords
Advice
• Decide if you really want to be a founder• Talk it over with your spouse and family• Attract people who have startup experience• Make some new friends, hang out at VC events
– Churchill club– Right-hand partners– Deloitte & Touche seminars
• Recognize early that you cannot keep it all
Homework Assignment• Write a two page business plan summary for a
new startup in the storage industry• Be sure to describe:
– A compelling description of the business– The team– The market – The customers and how the business generates
revenue– Potential Partners and the underlying relationships– Potential Competitors and their effect
• Resist the urge to “go deep” on the technology