Download The Innovator`s Dilemma

COEN 180
Storage Industry Overview
November 17, 2006
Andy Hospodor, Ph.D.
SCU ’86, ‘84
What Happened to Data Storage?
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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
RAMAC
Innovation
Expansion
Standardization
SMD-E
SASI
370 OEMi
SCSI
ST-506
Prop. Tape
ATA
Why does SCSI cost 4x ATA?
Commoditization
• http://isic.ucsd.edu/papers/EditorialINSIGH
T32000.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
The Big Consolidation
How Much Data is Out There?
Data Generation (2002)
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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.
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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.
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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).
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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.
Challengers to Magnetic Disk
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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
What’s hot
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Infiniband
Gigabit Ethernet
Storage Security
Continuous Data Protection
Storage Management Software
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
Information Sources
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http://isic.ucsd.edu/papers/index.shtml
http://www2.sims.berkeley.edu/research/projects/how-much-info2003/printable_report.pdf
• http://www.claytonchristensen.com/publications.html
• http://www.ssrc.ucsc.edu/
• http://www.magneticdiskheritagecenter.org/
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
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
Types of Startups
• 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
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No Idea, Stellar Team
$20M Capital
No Customers
Profitability?
Where does one start?
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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?
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
Lifecycle of a startup
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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
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
How does one become a founder?
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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
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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%
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 startup
most do not
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%.
What is an institutional round?
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Led by a professional Venture Capitalist
Often syndicated to other VCs
VCs, founders and previous investors
agree on valuation
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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 premoney 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
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
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!)
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
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
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
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http://www.riskglossary.com/articles/black_scholes_1973.htm
Analysis of Asset Allocation - Black and Scholes calculator
• VCs get more with a low valuation
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)
Good Places to waste capital
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Expensive office space
Legal fees
Marketing consultants
Human Resources
Trade shows
Sponsorship
Travel
Bonuses
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
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
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:
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Consultants
Attorneys
Vendors
Landlords
Advice
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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
Homework Assignment
• Write a two page business plan summary for a
new startup in the storage industry
• Be sure to describe:
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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