Handicapping Small Storage Vendors

The last decade has seen increasing consolidation in the data storage sector.  The “Big Seven” – HP, IBM, Dell, Oracle, Cisco, EMC and NetApp – have been rapaciously gobbling up promising new players in their quest to round out their product lines.  The primary driver of this consolidation has been the quest to offer a one-throat-to-choke posture to Global 2000 companies with their correspondingly massive IT budgets.  (A friend who works for a Big Seven company refers to it as “one-back-to-pat”, but you get the idea.)  Frankly I’m not sure this is a sound strategy but then again there are a lot of things that don’t make sense to me about the Big Seven.  I’m especially not sure it makes sense with regard to how they serve the needs of small and medium-sized businesses.  At any rate this trend will continue for the foreseeable future because they all have holes in their product lines, they are all sitting on huge piles of cash, and buying new technologies is often cheaper than developing them in house.

So, the future prospects of any small storage company come down to three potential outcomes:

1. Get bought

2. Successfully go it alone

3. Go under

Obviously 1 and 2 are the preferred outcomes.

Why care about the small storage players?  Because they are nimbler and less risk-averse than the big guys.  This affords them the luxury of bringing radical, sometimes disruptive solutions to the marketplace, often with customer service quality that is far beyond what the big guys can provide.  As a result these solutions can provide significantly greater business value than those offered by the Big Seven.  The differences in performance, density, capacity, scalability and TCO can often be dramatic.

So the question is this: how to successfully handicap small storage companies?  How to pick the winners who will eventually experience outcomes 1 and/or 2?  At Southern Data Storage this is a top-of-mind issue because obviously we don’t want to saddle customers with technologies or solutions that will eventually no longer have support from a viable “mothership”.  So we’ve developed a basic approach that I think is sound.  It’s not foolproof, mind you, but looking back over the years it seems that the survivors had certain attributes in common.  These, in no particular order, are the attributes that indicate that a small storage player has a good chance to prosper for the long haul:

Follow the “Smart” Money.  All venture-funded companies like to brag about their funding sources, usually on their websites.  This is IMPORTANT information because, although VCs sometimes lose money on their investments, many of them have solid track records of success, some spectacularly so.  This is easy to research because all the VCs have websites of their own, and they are usually fond of bragging about their past successes.  If a small storage company has obtained A and B rounds of funding from A-list VCs, they stand a very good chance of being around for the long haul. One caveat here: a storage company that we know has successfully survived for more than 12 years with very little venture funding.  This is actually a good sign – they got through the early, unsteady days with a sound, conservative business model and a compelling product (see below), and have succeeded in niche markets where they were able to maintain profit margins that enabled them to be largely self-funded.

Who’s in Charge?  (aka Nothing Succeeds Like Success.)  The next key attribute is the past successes of the management team.  All VC-funded small companies have web pages introducing the management team, usually with an abbreviated resume for each member.  It’s key to look at their prior experience and whether or not they were a significant contributor to guidance of their prior employer to an option 1 or 2 outcome.  If you don’t recognize the names of the prior companies and can’t tell if the results were options 1 or 2, that is easy to research.  It’s also helpful to look at the technology focus of senior management, primarily the CEO and CTO.  Is this current venture in the same sector of the industry as their prior (presumably successful) ones?

What is the value proposition?  For a new storage company, the product must compellingly meet the majority of the major attributes for storage product success: higher density, capacity, scalability, performance, security, lower acquisition cost and/or lower TCO.  It is not necessary to have ALL these attributes – although, remarkably, some do – but a majority of them, I think, is a requirement.

So, there is the Southern Data Storage method for handicapping small storage companies, and the method we use to determine which companies belong on our line card.  I hope this helps!