If you haven’t read them already, check out Part 1 and Part 2 in this series.
We discussed the rule of thumb for investor returns of 10-20x money raised in the first post in this series. Let’s have a look at some numbers that we actually know to see if reality matches the theory. As I said in part 2, I’m going to concentrate on the storage market, mostly because reasons.
Historial OPM
Violin Memory raised $186 million, and IPO’d for $736.4 million after hoping for $2bn in what is widely regarded as a failed IPO. The multiple here was 3.96x pre-IPO money raised.
Fusion-IO raised $115.5 million before its IPO in 2011 for $19 a share, valuing the company at $1.48 bn which was considered a success, only for the share price to drop fairly soon thereafter. The multiple here was 12.8x pre-IPO money raised.
Nimble Storage raised $98 million before IPO, and then went public at $21 a share valuing the company at $1.48bn, and the stock went up quite a lot on the day, which implies the merchant bankers under-priced the IPO. The multiple here was 15.1x pre-IPO money raised.
From these examples, we find validation for our rule of thumb. ‘Success’ is a post-IPO valuation of at least 10, preferably 15 times the total money raised before IPO, implying that investors who came in on the last round prior to IPO made 15 times their money, and those who invested before that made even more money. That’s bang in the middle of our expected range.
For some much older history, NetApp (then Network Appliance) went public in 1995 for $13.50 a share. I don’t have a cite for the valuation, but from the SEC filings, I think this worked out to about a $218 million valuation (in 1995 dollars), after raising (again, I think) about $11 million. That makes the IPO multiple 19.8x pre-IPO money raised, which feels about right, since NetApp was one of the more successful storage IPOs in history.
Current Money Raised
Here comes the fun part. Let’s look at how much money a bunch of storage companies have raised so far, and what that implies about how much they’d need to be worth in an exit. All figures are in $millions.
| Company | Money Raised |
Exit Valuation (10x) | Exit Valuation (20x) | Reference |
| Pure Storage | 470 | 4,700 | 9,400 | [cite] |
| Nutanix | 312 | 3,120 | 6,240 | [cite] |
| SimpliVity | 276 | 2,760 | 5,520 | [cite] |
| Kaminario | 143 | 1,430 | 2,860 | [cite] |
| Solidfire | 150 | 1,500 | 3,000 | [cite] |
| Tegile | 117.5 | 1,175 | 2,350 | [cite] |
| Tintri | 135 | 1,350 | 2,700 | [cite] |
| X-IO Storage | 150 | 1,500 | 3,000 | [cite] |
| Scale Computing | 50 | 500 | 1,000 | [cite] |
| Total: | 18,035 | 36,070 |
Depending on the timing, these companies are going to be competing for, at minimum, about $18bn worth of company valuation, and that’s just these storage companies.
As we discussed previously, there’s a convention that you go public (or get bought) after a series E funding round. It’s rare for a company to go to a series F, and it’s mostly about perception. The fun thing is, an IPO is largely about perception. People need to believe that the company is going to do well in the future so they can get their money back.
Who’s already gone to series E? Pure Storage, Nutanix, Kaminario, and Tintri.
SimpliVity had a series D on 10 March 2015, so they have some time up their sleeve. Scale Computing have done a series D, plus some other mezzanine rounds, and they’re a bit different to the other companies. SolidFire have also done a series D, as has Tegile. X-IO are odd, so we’ll put them to one side for now.
This means that we have four storage-y companies (yes, yes, I know some of them are hyperconverged players) that will be looking to go public, or sell privately, within the next 12-18 months before they run out of money. Is there enough money out there for all of them, at least $10bn and more like $12-15bn, and then enough left for the others who will likely follow closely behind them?
There were 275 IPOs on the NASDAQ in 2014, raising $85bn, and since the money raised is only a fraction of the actual valuation the company receives, it seems there’s plenty of money around in general. But is there enough money for storage companies?
Trade Buyers
The other option is for these companies to get acquired. But by who? EMC already bought XtremIO (for an exit of roughly 17.2x by my calculations, so well done to that team) and has a bunch of other products already, so they’re out. NetApp has its own flash platform, but the response has been mixed. I can’t see them admitting their EF series sucks by buying Pure.
Would Dell buy Nutanix? Their relationship has gotten cosier, and Dell is private now and could do whatever they like, but can they afford it? The Quest software acquisition was a big buy for them at $2.4bn and matched their strategy well. Having to spend nearly double that for a hyper-converged appliance company? When Dell already have storage offerings and are part of the VMware EVO:RAIL set? I don’t see it.
SimpliVity might try to get bought by Cisco, since they’ve been partnering up as well.
HP already has a bunch of their own stuff, and they’re busy splitting themselves in half. IBM have much bigger issues to sort out, but maybe buying some newer tech might help them out?
Or maybe someone out of left field? SanDisk have brought out their own flash array, and they bought Fusion-IO not that long ago.
It’s all a big confusing mess, really.
Justin’s Opinion
Before I started writing this post, I figured there would soon be a bloodbath of companies imploding, running out of runway and crashing, buying each other on the cheap, or trying to IPO and getting pretty ordinary results. I just feel like there are too many storage companies for all of them to do well, and we’ve already seen some of the weaker ones (Violin, Fusion-IO) stumble hard.
But when I look at the numbers, I think that if the market stays positive, and those who’ve raised a series E get their house in order quickly, they might stand to do okay in an IPO. There’s possibly one or two acquiring companies out there as well, but I think that’ll be hard for the acquiring company to justify with these valuations, particularly if you throw in a 25% control premium.
I guess this shows the value of looking at the actual numbers rather than relying on feelpinions, particularly when it comes to investing money, or doing mergers-and-acquisitions.
Pet, Or Steak?
But, and it’s a large but, let’s go back to the triggering notion of this post: Other People’s Money. The clock is ticking, and these companies will get pushed into doing something as their investors start to want their money back. VCs are not known for having lots of patience, and when a bunch of them own the majority of your stock, you don’t get to tell them when you’re going to IPO. If it’s a choice between a) killing the company, but getting most of their money back, and b) losing all the money, guess which option the VCs will take? They’ve got dozens of other bets going. These companies are cattle, not pets. They might be worth more as steaks.
I still have my own views on which companies are in a stronger overall position than others, but what do you think? Who will make it to IPO or acquisition, and who will crash at the end of their runway? Who would buy whom?
Let me know your thoughts in the comments.