COEN 180 Storage Industry Overview November 17 2006

COEN 180 Storage Industry Overview November 17, 2006 Andy Hospodor, Ph. D. SCU ’ 86, ‘ 84

What Happened to Data Storage? • • • 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 SASI 370 OEMi SMD-E SCSI ST-506 Prop. Tape ATA Why does SCSI cost 4 x ATA?

Commoditization • http: //isic. ucsd. edu/papers/Editorial. INSIGH T 32000. 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) • 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. • 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. • P 2 P file exchange on the Internet is growing rapidly. Seven percent of users provide files for sharing, while 93% of P 2 P users only download files. The largest files exchanged are video files larger than 100 MB, but the most frequently exchanged files contain music (MP 3 files). • 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 • • • 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 • • • Infiniband Gigabit Ethernet Storage Security Continuous Data Protection Storage Management Software

What’s not • ATA RAID (does it actually work? ) • Tape replacements – Fibre. Channel 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 • • http: //isic. ucsd. edu/papers/index. shtml http: //www 2. sims. berkeley. edu/research/projects/how-much-info 2003/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 Micro. Systems – IPO in 1986 – I/O XEL – Acquired by Peer Protocols in 1992 – Corosoft – Acquired by BMC in 2004 – Book. Renter – 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 – $1 M Capital – 1 or 2 customers – 5 years to profitability • Business B – Great Idea, Good Team – $5 M Capital – 1 customer – 3 years to profitability • Business C – Good Idea, Decent Team – Bootstrapped – 5 Customers – Instantly profitable • Business D – – No Idea, Stellar Team $20 M Capital No Customers Profitability?

Where does one start? • • 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 • • • Seed Phase $100 K “A” round $1 M “B” round $10 M “C” or mezzanine round (optional) IPO or acquisition $100 M 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 Fortune 500 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? • 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 • • Create a corporation and authorize 40 -50 M 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 $500 K and Sheila takes 3 M and Jim takes 2 M 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 $1 M from friends and family and distributes 10 M shares of stock. Newco is now valued at $1. 5 M with 15 M 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? • • • Led by a professional Venture Capitalist Often syndicated to other VCs, founders and previous investors agree on valuation – – • 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 $5 M from Sand Hill VC and distributes 10 M shares of stock. Newco is now valued at $7. 5 M premoney and $12. 5 M post-money with 25 M 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 $125 M • Sheila gets $15 M • Jim gets $10 M • VC gets $50 M (10 x return) • Friends and Family get $50 M (50 x 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 • 10 x 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 – – 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 • • 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, the 451) • 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: – – Consultants Attorneys Vendors Landlords

Advice • • 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: – – 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