NetApp - Dave's Blog

VCs Don’t Like Small Investments

When we were first starting NetApp, back in 1992, we thought that we could create a product and a company on an unusually small amount of money. We also thought our low cost would give us an advantage in trying to raise Venture Capital (VC) money. We were half right.

It took us just over a year from when we incorporated to ship product, and we had raised only $1.6 million dollars. To put that in context, some start-ups have raised over $100 million to enter the storage market and still not gone public. We shipped our first product with just eight full time employees and only three full time development engineers. The eight were a CEO, head of sales (the only sales person), head of marketing (the only marketing person), head of customer support (the only support person), an office manager, and three engineers including both James and me. We also had three part-time consultants—one on manufacturing and two more engineers.

We were right about building a product with surprisingly little cash, but we were wrong in thinking that VCs would find this attractive. VCs don’t particularly like small investments. In fact, we had to raise that first $1.6 million entirely through “angel investors”—rich individuals who invest their own money. The VCs wouldn’t invest until after we’d shipped product. It took another $10 million or so for us to go public.

In business, it’s always helpful to understand the other person’s perspective, so let me describe how the world appears if you are a VC. A VC fund is a lot like a mutual fund, except that instead of getting money from regular people, you get it from university endowments, pension funds, really rich people, and so on. And instead of buying stock in public companies, you invest in start-ups. Your job, as a VC, is to invest all that money you’ve raised, and the funds are sometimes very large. Some funds are a few hundred million dollars, some multi-billion dollars.

The problem is, it’s just not easy to invest that much money, and it’s almost impossible to invest that much money in small chunks. I recently had lunch with the CEO of a small start-up, and he told me that he was looking to raise $7 million, but one investor said, “Couldn’t you take $13 million?”

It boggles most people’s minds to imagine investing a hundred million dollars, much less a billion, so let’s imagine that you have $100 to invest, and you are trying to figure out what stocks to buy. (Me personally—I recommend index funds, but let’s just assume that you have your heart set on stocks.) It wouldn’t make sense to invest $1 each in a hundred different companies. That would take way too much research and would be a pain to manage. You’d probably be completely uninterested in a fifty-cent investment, no matter how good it sounded.

That’s exactly how a VC feels when a start-up comes in and says, “We’ve got this great idea, and best of all, we’ll only need a million or two.” VCs typically go on the boards of all the companies they invest in, and the last thing they want is to be on a hundred boards, or even fifty. After all, that might distract from the summer in Europe and the winter in the Caribbean. It’s much, much easier to invest larger chunks of money in a smaller number of companies.

Amazon Kindle: “It Completely Changed the way I read”

A friend of mine goaded me into buying a Kindle—Amazon’s electronic book reader. “You are supposed to be some kind of high-tech visionary. Electronic books are the future! How can you not own a Kindle? You ought to be ashamed of yourself.”

Thus chastened, I raced to my Amazon account and 1-clicked—$359. Ouch. I wonder how long till it’s below $100.

I have to say, I was surprised by how good it is. I’d read reviews describing it as “clunky and ugly”, but I found it to be light, easy to use, and—most important—the electronic ink is very easy to read, even in bright sunlight. That was critical during my beach vacation earlier this summer. Unlike LCD, it’s not backlit and has no funny polarizing effects with sunglasses; it feels just like ink on paper.

Another friend told me, “My Kindle completely changed the way I read.” That surprised me, so I asked him to explain. He said he used to read magazines in bed, because they are light and easy to hold, but books, especially hardcover books, are heavier and a bit awkward. The Kindle converted him from magazines (candy), to books (meat), and he’s happier for it.

One of the knocks on e-books is that people like the feel of a real book with real pages to turn. People worry that an electronic gadget will get in the way of reading. Perhaps that’s why I hadn’t bought an e-book. I can report that after the first couple books, the Kindle “disappeared”—it vanished from my conscious awareness. For people who like flashy gadgets, that may be a disadvantage, but as an avid reader, I thought that’s how it should be. Interestingly, the Kindle doesn’t have the same addictive attraction for me as a smart phone or a web browser. Maybe because the book just sits there, waiting for me to turn the page—no new-message alerts or latest news flashes.

Part of what appeals to me is the Kindle’s appliance nature. The Kindle sucks if you think of it as a small computer, PDA, or web browser: the keyboard is clunky, the display updates oddly, and browsing speed is slow. But for reading a book, the Kindle is absolutely perfect. An appliance does just one thing, and it does it well.

What’s most innovative about the Kindle is not the device itself, but the way it integrates so cleanly with the cellular network and with my Amazon account. Even though it downloads books using cell-phone technology, Amazon pays the bandwidth cost—pennies per book—directly to the phone company, so you don’t have to deal with yet another cell phone account. There was no setup at all: it said “Dave’s Kindle” as soon as I turned it on. (It knew because I had ordered it with my Amazon account.) You can order books from the Kindle itself, via a somewhat clunky web-like interface, or you can use your regular Amazon account. If you buy the “Kindle edition”, listed right next to “hardcopy”, “paperback”, and “audiobook”, it downloads automatically. And Amazon remembers what you’ve already purchased, so no backup is necessary.

This kind of tight integration can radically change the rules of an industry. It’s what Gary Hamel calls “strategic innovation” in his book The Future of Management. He contrasts it with “product innovation”. Folks who have tried the Sony Reader tell me that it’s absolutely beautiful—much sexier than the Kindle—but to download books you have to cable it up to your PC and go to Sony’s special web page. Great product innovation, not great strategic innovation. It’s like the difference between a generic MP3 player and how Apple has integrated the iPod with the iTunes store.

My favorite feature is that there is an email address where I can send JPEGs or Word documents to my Kindle. Whatever I send to dave_hitz@kindle.com shows up on the Kindle in seconds. The book I just finished writing won’t be published until January, but I sent the manuscript to my Kindle, and it made me feel all official and important seeing it there with the other “real” books!

Fibre Channel over Ethernet (FCoE): Hurry Up and Wait

The other day a customer told me that he was all excited about FCoE (Fibre Channel Over Ethernet), and he asked if I thought he should be doing anything about it right now. My response: “FCoE is best for people who would rather wait.” The standard isn’t even done yet, so it clearly isn’t for people in a hurry.

NetApp is a big fan of any kind of storage over Ethernet. We were the first big NAS vendor, we were an early iSCSI proponent, and NetApp is the market share leader of the “storage over Ethernet” market as a whole. We even participated in an FCoE proof of concept demo at the Storage Networking World conference last fall.

That said, my first reaction to FCoE was skepticism. Given that many people are already using iSCSI and NAS for mission critical applications—SAP, Oracle, as well as Exchange and SQL Server—I wondered why we needed yet another protocol for storage over Ethernet. If you are really interested in storage over Ethernet, why wait? Why not start saving money now? I even wondered whether FCoE was an evil plot by Fibre Channel vendors who were hoping to sow confusion and thereby slow down adoption of Ethernet storage.

Since then, I’ve been educated about the benefits of FCoE, and I’ve gotten over my conspiracy theory. The big advantage of FCoE is that, from a storage management perspective, it looks almost exactly like traditional Fibre Channel SAN. For many customers, the management differences between NAS, iSCSI and SAN aren’t a problem. The number one feedback I’ve gotten from customers who have just installed iSCSI is: “It just worked.” On the other hand, change can be painful and expensive for customers with large SANs, especially if they have invested heavily in documenting their environment and training their employees. For them, it’s a big win if FCoE can make the transition to Ethernet easier.

Some people also argue that FCoE will have a performance advantage. I see that as less of an issue because Ethernet can already handle the vast majority of applications today. Oracle has one of the largest data centers in the world, and they run almost everything on NFS over Ethernet. They have even optimized the Oracle database  specifically to work well with NFS. Nevertheless, Fibre Channel has a latency advantage for a small handful of very performance-sensitive applications, and FCoE will allow even this handful to run over Ethernet.

So what is my advice? That depends on your situation. If you have an existing Fibre Channel infrastructure that meets your needs, the best option may be to do nothing. If you are considering a major Fibre Channel upgrade in 2010, or maybe even 2009, then you really ought to investigate FCoE to see whether it will be in time to meet your needs. On the other hand, if you want to start using Ethernet storage right away, then you should look closely at iSCSI and NAS. The best strategy may be to deploy iSCSI and NAS for new projects, and then use FCoE to convert your existing Fibre Channel infrastructure to Ethernet over time.

Maybe the most interesting thing about FCoE is that everyone seems to be taking it very seriously. Despite my initial skepticism, it appears that Fibre Channel switch vendors really do intend to convert their existing customer base to Ethernet. Now that Brocade has purchased Foundry, all of the major Fibre Channel switch vendors also have an Ethernet solution.

The end-game has become clear. The future of Fibre Channel is Ethernet.