Wednesday, October 2, 2013

iBreakfast Startup - Violin Memory - Makes Music on Wall Street

Violin Memory IPO’s at $800 million

Back in 2006 when the iBreakfast ran a workshop at NYU’s Entrepreneur Club, we were presented with arguably one of the worst pitches we had ever heard. But also the best.


Technically, the pitch was confused and mumbled – but it described a fantastically big market on the edge of a tectonic shift. Most of all, the presenter was authentic. Donpaul Stephens was an engineer masquerading as a marketer with a patent-pending tech solution for a transformational enterprise flash memory product. He could have been Bill Gates' younger brother - and I once had lunch with Bill, so I would know.

Violin's CEO shows off product
The amazing thing is that every investor I sent him to or heard about it in New York turned him down. The deal was tough – they needed $5 million to launch – and almost no one understood the actual technology. In fact, several claimed it wouldn’t work.

For those of you who will be reading my book Are You Fundable? and wondering how to overcome these odds, take heart. They went public on the NASDAQ on Friday at an $800 million valuation.

This was not a simple story but that is exactly why it matters. You learn more from a sleeper that kept going than an overnight success. Or to put it in Violin’s terms it is more like a symphony with a lot of movements than just a catchy tune. More often that not, this is the story of most big Startup successes. 

The first rule in Are You Fundable? is that credibility – the ability to instill a belief in others that you can deliver - is critical. It helps if you pick a market that is expanding or about to be transformed. Then you have to find the right kinds of investors.

This sounds easy enough but consider: market that is about to transform means that you are betting on a change in the industry and you hope the road will rise to meet you. Investors tend to be skeptical about these things. Silicon Alley prefers to talk about disruption - a cheaper approach to an existing business. That tends to be a little easier to predict just so long as the entrenched companies don’t fight back.

With transformations, you have to find the right kinds of Investors the ones who get it, because you can burn yourself out on all the ones who don't. Even then, the right investors are may not be ready for you. That means you have to break the idea down and build it up in steps.

The problem here was that they needed the large amount of money just to build the box to prove that it really worked. For whatever reason, they couldn’t simulate it on a computer the way say, Bill Gates did with his operating software in the early days of Microsoft when he used Harvard's mainframes to simulate the pioneering Mitts Altair - the first personal computer and port BASIC to it without ever actually seeing tit. To make matters worse this pitch was taking place in New York - a town that really doesn’t do hardware. 

While Stephens had two previous exits and so technically was a serial entrepreneur, he wasn’t known to the investment community and the deals weren’t really home runs. The big hurdle was the price tag – Startups in Silicon Alley rarely raised more than $500K and usually came in at the $50K – 200K range.

I could definitely convince investors that enterprise storage will always want faster processing, lower power, and less heat and that flash memory prices would drop. Even though the cloud hadn’t really kicked in – the iPhone had just launched at the time – and flash memory was 100x more expensive than hard disks, Investors understood how that would change and just how big the Enterprise market would be. But the price tag was in the VC range and simply out of reach for the Angels – even if they had believed in the solution.

How do you overcome these hurdles?

The answer is, find a champion. It needed a committed insider who knewa the memory business and is willing to put skin in the game. At that point the money requirement is relatively minimal - in the low $100K’s. The champion then has to call in favors from all his industry contacts. It also helps if you can find a big problem that someone with deep pockets needs to solve. Enter the Department of Defense which thirsted for fast memory to process battle pictures. That helped with proof on concept and eventually led to industry orders and VC money.

None of this was easy and the music stopped for Stephens last year when left the company – with founders stock of course - before it went public. The company itself had its share of the blues -fluctuating from a fantastic $2 billion valuation to a not too shabby either $800 million after they lost a big customer and the market suddenly got crowded. But it will be a long time before the proverbial fat lady sings - the enterprise flash market is just getting started and there will be plenty of hits to come. Stephens will cash out after the lock-up period and like any good Entrepreneur will be on to his next Startup.

We will be out there grooming our next crop of amazing Entrepreneurs at the iEvening, Startupalooza and the iBreakfast and you can read about our way of thinking when Are You Fundable? comes out next week. Or just come to our next workshop and experience it live.

Are You Fundable?
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