They Don't Need No Stinkin' VCs

Can private companies succeed in storage networking without venture capitalists? Apparently, they can and do.

Let's start at the top: Private storage companies need lots of money, and the most common source of that money is venture capital. Our Top Ten Private Company lists bear this out (see Top Ten Private Companies: Early Summer 2004). The lists show plenty of well funded startups that get money either from venture capitalists or larger public companies in exchange for part ownership.

Besides funding, VCs help form strategy, make contacts that can lead to sales, recruit executives, and swing the types of deals that can take a company public or lead to an acquisition.

In exchange, however, private companies get diluted financially, and their leaders give up a lot of control.

But VC funding isnt the only way to go. Many private storage companies appear to be successful -- at least so far -- without venture funding. Here's a sampling:

Here's a further breakout:

Table 1: Selected Startups Without VC Funding

Not only have these companies been around for awhile, they generate revenue and have solid reputations among industry insiders. We talked to several of these companies’ executives about why they took the non-VC route.

“My question is, why would anybody use VC funding?” Intradyn CEO Gary Doan asks. “Actually, we did talk about it. But there wasn’t much happening in our space at the time [2001]. And since then, things have been happening too fast. We’d consider it if it’s the right mix. But to get VC funding just to get VC funding, it doesn’t go a long way.”

Seven Ten President Bobby Moulton agrees. “Our option was go give away 80 percent of our company to get $5 million,” he says. “We said, ‘Let’s go to customers first.’ When we still had beta product we signed three OEM deals that netted us $1 million, mostly prepaid. This was in late 2001, early 2002, when the economy was probably at its worst.”

Moulton says the Seven Ten crew considered funding even a year into existence (see Seven Ten Wants Two and a Half). They came close to getting $2.5 million in funding from Precise Software in November of 2002, but that deal died when Veritas Software Corp. (Nasdaq: VRTS) bought Precise (see Veritas Gets Precise). Seven Ten then renewed talks with venture capitalists, but passed on funding. Now, Moulton says, the company will have about $20 million in revenue this year mostly through OEMs and partnerships with EMC Corp. (NYSE: EMC) and Storage Technology Corp. (StorageTek) (NYSE: STK). (See EMC Integrates Seven Ten.) The company has just 10 people, including six developers.

Doan and Moulton agree that venture funding works for the right company, but not theirs. Both had a team and a strategy together when they started their companies. Doan, a former CEO at Internet networking firm Neo Networks, decided to fund Intradyn along with a few partners.

“VCs make sense when you have an idea on the back of a napkin and you want to build a team,” he says. “But you hand over a lot of higher-level strategy to a VC. Also, we wanted to get product out before we talked about it. When you’re with VCs, everybody knows about it long before you get your product out.”

Seven Ten’s original management team came from Smart Storage, a startup that was acquired by OTG Software. Moulton agrees it makes sense to go the VC route if you need to build a team, but “we had a team and we had a Rolodex.”

The second item shouldn't be undervalued. “VC guys know people. They can help sales get done. They also give guidance and support to take you through what can be ugly hard times," says financial analyst Steve Berg at Punk Ziegel & Co. "But they get to hold some of the company in exchange.”

Where do these companies go from here? Maybe they'll give in to the VC pull after all. Doan says Intradyn isn’t profitable, but “we can see it on the horizon.” He says he would consider some type of funding to accelerate sales and marketing, especially with a newly launched email archiving appliance on the market (see Startups Look for SMB Feast).

Luminex CEO Arthur Tolsma says his company is profitable but he stays in touch with VCs, just in case. "Once a week, somebody calls," Tolsma says. "We haven't said, 'We need the money.' It's more of, 'Should we take the money to increase opportunity?'"

Moulton, in contrast, says he can see Seven Ten going the way of Precise and getting acquired by a larger company. “We have an exit strategy,” he says, “and I believe our exit strategy is sooner than later.” If that happens, the Seven Ten team could be even happier not to share their take with VCs.

— Dave Raffo, Senior Editor, Byte and Switch