A beginner's guide to spending $100m

Leaders from two of Silicon Valley's best-funded start-up vendors discuss what their new-found wealth means for them and the industry

The question of what to do with a sudden cash influx of more than $100m is usually only faced by EuroMillions winners or those fortunate enough to unexpectedly discover a beautifully preserved Picasso original gathering dust in the loft.

But in recent months a number of start-up IT vendors have been the beneficiaries of nine-figure sums of venture capital (VC) cash. The amount of investor money flooding into Silicon Valley is huge, and rising; where once a funding round of somewhere in the region of $15m to $30m might be considered a coup, now vendors are raking in sums of $50m, $100m, even $200m and upwards at a time.

However you come into it, receiving such an astronomical amount of money will inevitably change the way you think and act. CRN recently caught up with senior executives at two of the IT world's best-funded start-ups to find out how their new-found wealth will impact growth plans and channel strategy.

Storage virtualisation outfit Nutanix and flash array specialist Pure Storage were both founded just five years ago, but have already cumulatively accrued more than $640m in outside investment. A $101m series D investment in Nutanix in January - which took its running total to more than $170m - was certainly eye-catching. But even this was comfortably eclipsed by the $225m (£133m) in series F funding raised by Pure Storage last week. The California-based firm has now drummed up upwards of $470m in VC lolly, and is valued at $3bn.

Public interest?
At this point in its hitherto successful lifespan, one might expect a start-up to have half an eye on floating publicly. And Pure chief executive Scott Dietzen admitted that there was a period in 2013 when the firm considered undertaking an initial public offering (IPO) to the stock market. But the hefty cash backing which ultimately saw the company take the decision to remain private is likely to be a scenario played out at other vendors, he predicted.

"There is a trend towards staying private longer," said Dietzen. "The most common rationale is the overhead of complying with new regulations over accounting rules and Sarbanes-Oxley, which brings an additional cost."

Steve Kaplan, vice president of channel and strategic sales at Nutanix, echoed the view that the recent Pure Storage investment "shows that the potential exists for start-ups to remain private longer, yet still gain access to tremendous capital".

He also asserted that the speed with which young vendors look to sell up, float, or attract big VC investment has increased markedly. Incumbent giants are now unable to take a long-term watching brief when it comes to potentially disruptive technologies, he claimed.

"In general, we've seen the cycle of disruption continue to shrink from around 10 years to maybe three or four years today," said Kaplan. "Larger companies no longer have the luxury of waiting for many years to see how a new disruptive firm shakes out - and then acquire the successful firms or their competitors. They now need to act much more quickly which implies much shorter acquisition time frames (such as ScaleIO, ExtremIO, and Nicera) or much faster launches of IPOs or of massive private rounds of funding."

Liquidity may not be a problem for companies with the kind of backing enjoyed by Pure and Nutanix. But Dietzen explained that growing a company so quickly brings other challenges.

"As the industry evolves, one of the biggest challenges is recruiting a large, worldwide organisation. We are growing at more than 50 per cent quarterly, and are adding an almost corresponding amount of headcount," he explained. "When you are growing your business so quickly, you have to work really, really hard to ensure you are hiring great people."

Indirect benefit
Thankfully for the channel, both the Pure boss and Kaplan at Nutanix stressed that they would not be spending their warchest on building out a direct sales infrastructure, with both vendors intending to remain 100 per cent channel focused.

"The channel has been our best route to market and nothing changes as a result of the financing," said Dietzen. "The upstarts are definitely in need of access to more customers than they could cover - EMC outnumber our field organisation by 50 to one. I actually think the additional money that is going to these disruptive vendors is really good for the channel, as it creates lots of opportunity, because the upstarts are always starved of [customer] access."

Kaplan added that: "Our funding enables us to, among other things, hire top-notch channel personnel to assist our partners in growing their businesses, facilitate increased demand-generation activities across the globe and build much faster brand-awareness."

The Nutanix partner leader also stressed that having greater financial clout does not tip the channel balance of power towards vendors.

"If this were the case, then the industry incumbents - who obviously have vastly more multiples of cash than even the best funded start-ups - would continue to maintain an iron grip on the channel and dictate the terms of engagement."

But the pace of change, and the increased speed with which start-up vendors are able to compete aggressively against existing giants, will bring challenges for VARs, Kaplan predicted.

"Just as the large manufacturers no longer can afford to wait to see how new disruptive technologies play out, neither can partners," he explained. "The disruption is happening so quickly now that partners who continue to only promote their legacy datacentre incumbents risk irrelevancy as their clients increasingly realise that they are failing to bring these new superior technologies to their attention."

Dietzen also opined that, for any channel partners worried that a cash-rich vendor might increasingly overlook them, "the risk is the opposite".

"We see very uneven uptake in our channel, where some partners are growing as fast as us - 50 per cent sequentially quarterly - and others are not. "[The incumbent] vendors are losing share, and they do not see how quickly the market is changing, and this is why we want to make it easier for [partners to engage].

"The challenge for the channel is trying to sort out their future business in the face of all this fast-changing opportunity. It puts substantial pressure on them - there are lots of different upstart vendors vying for their attention."

Another bubble?
Just as there was in the millennial dotcom boom, there are currently huge amounts of capital flooding into the tech world, with valuations of relatively young companies soaring ever higher. But Dietzen, who "was part of Bubble 1.0", is confident that there will not be the same cataclysmic bursting this time, and claimed that "it feels substantially different".

"That is not to say that valuations cannot get ahead of business. There is always the risk that you get a [challenged] growth time where that can happen. But the difference is the number of disruptions.

"Last time most people were simply trying to reinvent every business online, which ultimately only served the bricks and mortar incumbents more than it did the upstarts. What I see in B2B is a lot different, as it is disrupting all the incumbents in a profound way. The last time around there wasn't anywhere near the level of disruption inside the datacentre. I think we are going to see a much higher hit-rate because of the level of change.

"The smart channel providers like it because they see it as the opportunity to differentiate."

Look out in the next issue of CRN for a full exploration of how trends in VC funding are likely to affect resellers, as we talk to a range of vendors and channel players to find out what impact they have seen.