Data storage industry profit woes costing local jobs

Earlier this month, I attended a dinner party in Concord, Mass., at which an executive at Hopkinton’s EMC told me about job cuts at the company.

He was fortunate to be among the survivors, but was looking for whether there were better opportunities elsewhere.

Job cuts in the data storage industry are not limited to big local companies.

DataGravity - a Nashua, New Hampshire-based company whose president, John Joseph, is a graduate of WPI and Clark University - also hosted layoffs recently. And so did Waltham’s copy data management supplier, Actifio.

With a subzero arctic chill now upon us, the frigid air of enraged Silicon Valley investors has already hit the $100 billion data storage industry.

As losses mount, investors are turning their backs on requests for new capital and employees are finding themselves out of jobs.

EMC that has said it’s cutting $850 million in costs, including layoffs, to facilitate its buyout by Dell, according to The Register.

And to that we can add job cuts at Newark, Calif.-based flash storage provider Tegile, which recently cut headcount in Europe, according to The Register, as well as Sunnyvale, Calif.-based networked attached storage supplier, Panasas, which reportedly axed a handful of top executives.

Moreover, The Register reported that Actifio cut 10 to 15 percent of its staff and DataGravity - whose investors include Silicon Valley venture capitalists, Accel Partners and Andreessen Horowitz - cut an unspecified number of people.

Michael White, head of DataGravity Labs, wrote about his departure from the company in a Feb. 6 blog post about the company’s reduction in force.

Technology stocks are plunging this year. Indeed, the S&P 500 Information Technology Index - that includes Apple to Facebook - was down 15 percent from its recent high, according to Bloomberg.

And publicly-traded flash storage companies, Pure Storage and Nimble Storage, are doing worse. Pure’s revenues soared 168 percent in the nine months ending October 2015, when it lost a whopping $169 million, according to its most recent quarterly report, and its stock was down 40 percent since its October 2015 high as of Feb. 9.

Nimble Storage has a similar financial profile, but its stock was down 90 percent since its February 2014 high as of Feb. 9.

This leaves hyper-converged appliance market leader, San Jose, Calif.-based Nutanix, sitting on a December 2015 IPO filing with rapid revenue growth and huge losses.

Founded in 2009 – Nutanix enjoyed a 90 percent boost in revenue for the year ending July 31, 2015 to $241.4 million – but its net loss spiked 50 percent to $126.1 million during the period according to its December 2015 prospectus.

But last October, it had about a year’s worth of cash left by my calculations. It burned through $13 million in cash in the October 2015-ending quarter, leaving it with $55 million in cash, according to its prospectus.

Will Nutanix be able to sell its shares to the public? And if not, how much longer can it survive without a new capital infusion?

What is going on here is pretty simple - venture capitalists are swapping Fear of Missing Out (FOMO) for Fear of Losing Everything (FOLE).

Over the last several years, investors in the grip of FOMO have been afraid of not having a horse in the race for the hottest markets - such as cloud storage, flash storage, and hyper-convergence.

The cost of being in this race was to provide enough capital for these companies to hire huge sales forces and sell their products at very low prices in order to grow quickly. The goal was to reach $100 million in revenues very rapidly so the companies could go public.

But those venture capitalists are now reaping the bitter rewards of their FOMO. The fast-growing, money-losing companies they took public are punishing investors so much that can’t take any more.

And venture capitalists are realizing that they are not going to be able to get back their money through public markets.

Instead, venture capitalist have flipped to FOLE — or at least fear of losing everything they invested in these data storage startups.

Under the grip of FOLE, venture capitalists are telling their portfolio companies to cut costs, reduce their burn rate, develop a clear path to profitability, and make the cash they’ve raised so far last long enough to make it through Silicon Valley’s arctic winter.

Mr. Joseph seems to view this as a healthy development.

As he explained in a Feb. 9 interview, “You can think of the situation at DataGravity from the perspective of the market and the company. At the market level, the climate is shifting from top-line growth at any cost to reasonable top-line growth with a path to profitability within a reasonable period of time.”

Unicorn fever led to the growth-at-any-price phenomenon. “There are 152 unicorns. Investors wanted to invest in them and were paying the highest price that the market would bear. But if you look at companies like Nutanix and Pure Storage, you see that they are spending a lot of money to generate revenues. Investors want returns and you can’t get them if you are spending two dollars to generate every dollar of revenue. You need efficient conversion to create the top line,” he said.

Mr. Joseph is optimistic about DataGravity. As he said, “We launched a revolutionary new product. Customers told us they wanted us to enhance our data security. For industries such as healthcare – where patient social security numbers might reside in 600 files – data security is of paramount importance. We just hired a chief information security officer to solve this problem. We did some tightening and so did six other companies in the industry.”

Actifio CEO Ash Ashutosh was also optimistic. As he told The Register, "After six years of rapid growth, we took a close look at (the) productivity of sales and post-sales teams, turned over the nonproductive ones, hired new teams and doubled down on profitable, high-growth areas.”

If the current Silicon Valley winter lasts as long as the one that began in March 2000, it could be at least 10 years before FOMO returns.

And if any of these data storage startups - or any money-losing venture-backed startup for that matter - can make their remaining capital last that long, I will be very surprised.

Peter Cohan of Marlboro heads a management consulting and venture capital firm and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.