Data storage startups—do they still make sense for enterprise buyers?

In a transformed storage marketplace, the ground beneath the start-ups’ feet is shaking.

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Quick pop quiz question: When was the last time a data storage company successfully went public, and is still an independent public company today?

Answer: November 1995. The company was NetApp.

The fact that it was more than two decades ago, an eternity in IT time, tells you a lot about the hazards of the storage market for new entrants and the challenges that startups face to survive and thrive in our very competitive industry. If you’ve scoped out the market landscape recently, you’ve no doubt come across a bunch of new names in addition to the long-established leaders like HPE. You’ll have seen what looks like a vibrant, healthy ecosystem of smaller players alongside familiar industry pillars.

That apparently reassuring surface hides a grim new reality for storage startups. The ground has shifted suddenly and quite dangerously beneath their feet. Their lives have changed irrevocably, though they may not have realized it yet. Storage decision-makers should be aware of the new challenges facing the startup ecosystem and be prepared for a major shakeout.

Where did all the sugar daddies go?

The first shock wave for the startup ecosystem is the rise of technologies that exploit tighter integration with other core elements of the datacenter, specifically compute and networking. As I noted in a recent Computerworld article, Twilight of the Pure-play Storage Gods, the glory days of the pure-play providers are drawing to a close. The world is moving toward full-stack vendors. If the need to engage with that reality was enough to push EMC into the arms of Dell, it will certainly tax the resources of new entrants to the standalone storage space.

The second tremor is a wave of consolidation and M&A saturation among potential buyers of startup technologies, the top-tier storage vendors. Very few startups can count on being as fortunate as EMC in finding a buyer for the simple reason that there are very few buyers left in the market.

EMC itself will soon be out of the picture as a potential independent buyer, of course, once Dell and its private equity partner Silver Lake finalize the merger. And it’s not likely that Dell, a private company, will be in the market for a new storage-technology acquisition after spending an estimated $67 billion on EMC. Indeed, for the newly combined entity, the immediate question will be how to rationalize its own overlapping product sets (See my blog A Heads-Up that Dell-EMC Storage Customers Must Consider.)

Similarly, NetApp has a new property to assimilate with the completion of its purchase of all-flash storage vendor SolidFire in February. Will the investment help NetApp recover from what TechTarget senior writer Carol Sliwa calls “the failure to capitalize on hot storage technology areas such as all-flash arrays and hyper-convergence” (see Sliwa’s article Sudden NetApp CEO Change Deemed Necessary)? That remains to be seen, but it’s unlikely the company will be going shopping again any time soon.

What about IBM? Not an encouraging picture there, either. The company has been consistently and continuously de-emphasizing the hardware and systems side of its operations, as we saw with the sale of its x86 business to Lenovo in 2014.

No more dodging the profitability issue

The availability of the top-tier sugar daddies has been crucial to the existence of the storage startups. The old playbook for a startup went like this: You build an interesting product and you look around for a venture capital firm to help you take it to market. Then you grow your business as fast as possible under an unsustainable business model with all energy focused on revenue growth. As often as not, you run up huge losses along the way. It doesn’t matter too much because your end-game is to be acquired by a bigger player.

It’s a time-honored model in the storage space and there is no question that the innovation the smaller vendors generated has been an invaluable resource for the dominant players. That includes HPE we have a history of successful integrations, and nobody is ruling out more in the future.

That said, times are changing. The number of buyers for startups is shrinking, and buyers are not as acquisitive as they once were. What if a startup’s hoped-for buyer fails to materialize? There’s only so long you can continue as a loss-making enterprise before investors start to get fidgety and look for ways to cut their losses.

Any savvy storage buyer knows that choosing a startup as a technology partner is a trade-off. It involves weighing the potential benefit from a new product against the often questionable long-term viability of the vendor. In the past, you might assume that a startup would eventually be acquired and its products would continue to be offered under new ownership. In today’s climate, that assumption is questionable, and a higher level of caution and due diligence is called for.

The storage technology story has always been full of twists and turns, and nobody knows what new niches may open up for market newcomers down the road. But for today’s startups and their customers, life is going to get much harder for the foreseeable future. Enterprise storage buyers should plan accordingly.