VC Money—Who Needs It?
January 07, 2013
Most tech startups follow a similar path to market: An entrepreneur or a small team comes up with a good idea, writes a business plan, builds a prototype with their own money or angel funding, and then pitches it to the venture capitalists on Sand Hill Road or in Boston. The venture folks take a good size chunk of the company, give the founders some money, and they're off to the races.
However, a few companies are bucking this trend and trying to be successful without the venture funding. There are good reasons to be leery of venture capital. The biggest reason is that VCs demand short-term results. Unlike Warren Buffett, the last thing a venture capitalist wants is to maintain an investment in a company for 20 years and get a decent return. VCs want to invest their money for one to five years and then make several times what they invested when the company goes public or sells out to a more established firm.
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This short-term focus means the VCs may pressure an entrepreneur to bring a product to market before it's ready, or force the founder to take that offer from Engulf and Devour rather than run the business for the long term.
Just Say No
In the storage space, two companies are making a run for success with varying degrees of VC involvement. One is Nimbus Data, which makes all-solid-state storage systems. Nimbus founder Tom Isakovich used VC funding for his first startup, TrueSAN Networks, which his funders sold out from under him. To avoid this fate again, Isakovich launched Nimbus Data with just a couple million dollars in angel funding and from internal cash flow. He didn't have to give investors any board seats, so they can't sell his baby in exchange for a quick return on their investment.
Permabit is a more complicated case. Launched in 2000, the company initially took venture money from the Global Strategic Investment Fund and TechQuest Capital Partners, and in 2005 got a C-round of funding from Baker Capital. Permabit used the venture money to release Enterprise Archive, a CAS-based archive system using a Redundant Array of Independent Nodes (RAIN) architecture. Unfortunately for Permabit, the market for compliance-driven archiving never grew beyond EMC's Centera product and Enterprise Archive didn't set the world on fire.
In 2010, Permabit's management decided to resell to other vendors the deduplication technology they'd developed for Enterprise Archive. The problem is, OEM sales cycles are long and license revenue trickles in slowly, which is not a model venture capitalists are fond of. So Permabit's management found a private investor who could take a longer view, bought out the VCs, and started pedaling their technology on an OEM basis.
Permabit's dedupe technology, now dubbed Albireo, promises both higher performance and greater scale than the generic deduplication now becoming common in many storage systems. Permabit has had some public success with this model as vendors including high-end NAS vendor BlueArc (since acquired by HDS) and array vendor XIOtech announced they were including Albireo in their future products.
For various reasons, including the above-mentioned acquisition, the market has not yet been flooded with Albireo-powered deduplication, but Permabit's management and investors are betting on the long-term value of the technology.
I know that venture capitalists have a role in fostering innovation and creating new businesses. And good VCs bring more than just cash to a new company; these firms have ridden the startup roller coaster many times and can leverage that experience to help portfolio companies avoid mistakes they've seen in the past. Just as importantly, many customers see top-notch VC involvement as an endorsement of a startup's management team and technology, and are often more willing to buy a product from a startup backed by well-known VCs than from a startup using internal funds. Those are compelling advantages for a new business.
That said, I personally think the United States would be better off if more companies--and investors--took a longer-term view of building sustainable businesses. That's why I'm rooting for entrepreneurs who forgo the traditional VC model and cut their own path.