07:42 PM
Howard Marks
Howard Marks
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Why Nimble Storage's IPO Succeeded

Hybrid storage array company raised $168 million in its IPO today. Meanwhile, Violin Memory tumbled after its September IPO. Here's why.

Hybrid array vendor Nimble Storage went public Friday in what is, as Wall Street measures it, one of the more successful IPOs of recent memory. The company raised about $168 million dollars selling eight million shares at $21 each. That should give Nimble a big enough war chest to give customers confidence that it's a player for the long run.

Unfortunately the Nimble IPO also exposes the perversity of the finance world. Only Wall Street insiders get to buy shares at the IPO price. The underwriters get to dole out IPO shares to their brother-in-law, the CFOs of companies they do a lot of business with, or other connected folks. When the stock soars in the first few days of trading as the ordinary citizens bid up the shares, these insiders sell off, making a bunch of money from their privileged position.

In the case of Nimble, the good news is that all the stock that was sold in the IPO was issued by the company, where in some IPOs the executives, VCs and other early shareholders sell off some of their shares as well. This means both that the full $168 million went to the company and that the early investors still believe Nimble is a good investment. The less good news is that on the first day of trading, the stock jumped up to $34 a share so the insiders, at least on paper, made $104. In the best of all possible worlds, the underwriters would have better assessed demand and priced the offering at $30 or $31.

However IPOs aren’t measured by how much money the company raises, but by the bump the stock takes. So the underwriter is incentivized to underprice the stock to make money for the VIPs he sells IPO shares to, keep them as customers and impress the CEOs and VCs at the other pre-IPO companies that they can avoid the embarrassing post-IPO collapse ala Violin Memory.

So why are investors gobbling up Nimble shares while Violin has lost 63% of its market value since going public in September? After all, both companies make flash-oriented storage systems and the market for both hybrid arrays and all flash systems is growing.

As I see it, there are two big reasons. The more important one is that Violin is selling a product that's time has passed. Sure, a Violin Flash Memory Array can deliver 750K IOPS but so can a 3Par 7450, and the 3Par also does snapshots, replication and all the other data management features we’ve come to rely on over the years. Pure Storage and EMC’s XtremIO can deliver plenty of IOPS and data deduplication to boot. That puts Violin in a tough market position. Add in a bloated CEO compensation package and investing in Violin isn’t an attractive proposition.

Nimble sells a full-featured hybrid array, and while it can’t charge as much as Violin for each unit, there are a lot more customers for hybrids than for all-flash arrays with limited data management. Nimble is adding between 250 and 400 customers a quarter and there’s plenty more room for growth.

[Read about Nimble's architectural approach in "Nimble's 'Scale to Fit' Storage Architecture Can Scale Up 0r Scale Out."]

At the end of one of my Storage for Virtualization seminars last week, I was asked to recommend a storage system. My first question to that person was “What is your company’s risk tolerance?” Some risk-averse companies should only buy from leading vendors. If an EMC, HP or Dell system fails to perform as promised, it’s their problem. If you recommend a WonderStor 5000 and it doesn’t work, it’s yours.

Plus, any time you buy from a startup, say Starboard Storage, regardless of how good the product is, you’re taking a risk that it’ll go out of business. I think Nimble has just crossed over that line -- you can rely on the company being around, even if it’s as a division of Engulf & Devour, for the useful life of any array you buy from them.

Oh, they have some interesting technology too, but that’s a matter for a later post.

Disclaimer: Starboard Storage, Pure Storage, EMC, HP and Dell are or have been clients of DeepStorage, LLC. Nimble has presented at several Storage Field Day events I’ve attended and therefore indirectly paid my travel expenses to those events.

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User Rank: Apprentice
12/16/2013 | 7:50:07 PM
re: Why Nimble Storage's IPO Succeeded
Minor edit: The third paragraph should indicate that the insiders made 104 *Million* dollars instead of 104 dollars.
Also, in the italicized text at the end, I would have used the word "Disclosure" instead of "Disclaimer".
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