A unicorn is a startup that’s valued at more than $1 billion, and the fact that someone’s counted 142 of them is ample evidence of a venture capital bubble.
Virtustream, which sold to EMC for $1.2 billion this year, wasn’t part of that crowd. In fact, Virtustream was the opposite. Unicorn companies tend to be Silicon Valley-based, with youthful founders pursuing consumer markets. Virtustream was founded in Bethesda, Maryland, by men over 40 who targeted the gray-suited enterprise market.
“We’ve never been accused of being sexy,” CEO Kevin Reid said, speaking during Monday evening’s kickoff session at the Intel Capital Global Summit in San Diego.
Reid and co-founder Rodney Rogers talked about Virtustream’s beginnings and the perseverance it took to get to that $1.2 billion. Virtustream not only became part of EMC (which is becoming part of Dell), but also is the foundation for a managed-cloud business that EMC and subsidiary VMware will jointly own.
The company’s uncoolness was apparent from the start. In 2009, Amazon Web Services (AWS) was just entering the mainstream consciousness and was considered a platform for webscale-sized consumer applications. Virtustream wanted to apply the AWS concept to the enterprise, running mission-critical applications.
A lot of people thought this was lunacy. Virtustream’s Twitter feed got hit with taunts every day, Rogers said. But he and Reid were intent on being the first to bring their idea to market.
“We wouldn’t have gotten the result that we did if we had not started writing code in 2009,” Rogers said. “We felt we were already behind.”
Series A funding came from Columbia Capital, which had previously funded Reid and Rogers in Adjoined Consulting. The key was familiarity. Adjoined had exited successfully, acquired for $165 million by Kanbay, and Reid and Rogers subsequently helped lead Kanbay’s $1.25 billion acquisition by Cap Gemini.
Late in the A round, Intel came in, lending Virtustream some sudden credibility in tech circles. “They were VCs in every sense of the word — at the time, I think, the largest VC in the world,” but it was the Intel logo that was “very important as a credential for our technology,” Rogers said.
That Sick Feeling
Virtustream’s big turning point came in 2013, when SAP nearly bought the company. In vigorous board discussions, Intel was one of the investors opposed to the sale, Reid and Rogers said. Eventually, Virtustream turned down the deal, instead talking SAP into becoming an investor in the startup’s $40 million Series D.
“It is a very tough decision to walk away from anything when you’re an entrepreneur — business or an acquisition,” Rodney said. “You have a sick feeling when you walk away from something like that.” (It’s a feeling New York Mets manager Terry Collins might recognize.)
Part of the rationale was market momentum. The enterprise cloud was starting to look like it might really happen.
Having SAP as a believer gave Virtustream a boost similar to what it got from Intel. “That allowed us to go after the market segment that we were already focused on,” Reid said.
After that, the next logical step was to go public. “We felt we could get out late this quarter or early next quarter,” Rogers said. Virtustream wrote an S-1 and enlisted Goldman Sachs as lead underwriter.
But by then, interested buyers had emerged. And that’s how Virtustream ended up in unicorn territory — through the “real tension” built from having more than one suitor interested.
“Enterprise value is created by profitability, growth, and all of the promise thereof, and while technology itself is exciting and you can create things that are very unique … you can’t really bank on that being the thing that drives you to $1 billion,” Reid said.
“Ultimately, you’ll get a billion dollars by virtue of somebody that’s willing to pay $1 billion.”
Photo: Reid, Rogers, and session moderator Heather Somerville of Reuters.