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COEN 180 Storage Industry Overview

COEN 180 Storage Industry Overview. November 17, 2006. Andy Hospodor, Ph.D. SCU ’86, ‘84. What Happened to Data Storage?. 1960’s – Innovation 1970’s – Expansion 1980’s – Standardization 1990’s – Commoditization 2000’s – Consolidation 2010’s - ???

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COEN 180 Storage Industry Overview

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  1. COEN 180Storage Industry Overview November 17, 2006 Andy Hospodor, Ph.D. SCU ’86, ‘84

  2. 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

  3. RAMAC

  4. Innovation

  5. Expansion

  6. Standardization SMD-E SASI SCSI ST-506 370 OEMi ATA Prop. Tape Why does SCSI cost 4x ATA?

  7. 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

  8. The Big Consolidation 2006: Seagate, Hitachi, Fujitsu, WD

  9. How Much Data is Out There?

  10. 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.

  11. 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

  12. What’s hot • Infiniband • Gigabit Ethernet • Storage Security • Continuous Data Protection • Storage Management Software

  13. 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

  14. 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/

  15. 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

  16. 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

  17. 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? Types of Startups

  18. 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?

  19. 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

  20. 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

  21. 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

  22. 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%

  23. 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

  24. 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%.

  25. 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 business Example: 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

  26. 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

  27. 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!)

  28. 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

  29. 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

  30. 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

  31. 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)

  32. Good Places to waste capital • Expensive office space • Legal fees • Marketing consultants • Human Resources • Trade shows • Sponsorship • Travel • Bonuses

  33. 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

  34. 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

  35. 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

  36. 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

  37. 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

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