A view of Bluearc … and to a degree, a fair number of storage companies

At The Register, Chris Mellor has an interesting article on Bluearc. In it he notes that they just raised a new series of capital

BlueArc, the hardware-accelerated NAS array supplier startup, has pocketed another $20m in a seventh funding round, taking total funding to around $225m.

Seven rounds. Total capital input is $225M USD. For a VC to be really interested, they need to see some serious multiplicative effects of this investment. Assume that they can exit at 10x valuation … assume that for $20M they sold 50-ish percent of the company. VC’s typically want in the 33-50% region, and the money is expensive. That means that their post money valuation is of the order of $40M or so. So they need to exit around $400M and up to be interesting to the folks who just put in money.

Several things fascinate me about this. First, if we changed “Bluearc” for another set of vendors, we’d have a very similar story.

Second, as Chris points out

The company was started up in 1998 and, 12 years later, still isn’t able to stand on its own feet and make profits.

Yeah, this is an issue. But not simply for them. Other folks in this market have had many many tranches, and aren’t at a self sustaining profitability yet.

Thats whats interesting about this. Does the market support very high cost per gigabyte and high cost per IOP storage anymore? It may have in the 90s and early part of the last decade … but times have changed.

In the case of Bluearc:

Its use of FPGA hardware to accelerate NAS (network-attached storage) file access puts it in the premium performance-centric part of the market, competing against NetApp in the mainstream filer market, and Isilon and Panasas in the scale-out, media NAS market.

They have had a liquidity event scheduled, and then pulled back from it. Others had postponed IPOs, you do that when the market for IPOs goes south. And it has. But investors want exits. They want to be able to sell the shares at a gain. And pull their capital out. So they want the IPO or an acquisition, and they want it at a significant step up above the IPO share price offering.

Which brings us to Isilon, which is called out in the article as being relatively successful. Its share price hasn’t done well though over time. This means that investors that bought in at the IPO are underwater. Chances are that the $1.1B current valuation isn’t providing enough multiples to the VC’s to claim a nice IRR on that investment when they sell.

And then Compellent, though they aren’t really in the HPC space, they are indicated as being a competitor to Bluearc. Again, their share price isn’t showing great growth.

More to the point, Chris notes:

Then IBM has its SONAS scale-out NAS product, LSI bought OnStor, and Dell is buying Exanet, another scale-out NAS company, which turned $70m of funding into a $12m purchase price; a horror story for the investors. HP has its own X9000 scale-out NAS technology as well. It sure is a crowded field out there.

I think that observation is right on the money. Its a horror story for investors … as some of the key/critical assumptions are … well … not correct.

Copan sold its assets to SGI for $2M. MAID, once a darling of an idea in the market, that provided a neat way to keep power down for storage, couldn’t recoup the initial investment.

So while Chris was writing about Bluearc, he could have been writing the same article, with slightly different numbers, about most of the “top tier”. Thats what’s interesting.

I should point out that Chris does imply that they may be setting themselves up for an acquisition, as this could be the last raise they would be able to do. I can believe the latter, not sure about the former … well … possibly, but a potential acquirer could simply wait for them to burn through the capital, and then buy the assets at auction. Much cheaper that way than paying a premium.

In fact, I should note that I see a great deal more of this these days … large companies doing either specific point deals, or large strategic deals as in the past, or … picking over the interesting bones of a market flameout. In the current economic state, it doesn’t surprise me that I see this latter “exit” being more prevalent.

The side effect of this is, that if this catches on and becomes the preferred acquisition modality, that will scare off many investors, as the IPO road has largely been shut down as a viable pathway. So most companies in the 2000’s time have been positioning themselves to be acquired, and have VC presented business plans along those lines. Change that dynamic so you only go after existing or near defunct organizations as your primary growth method …

Ugh.

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