Brit disk biz Nexsan out of the frying pan and into the firing line
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Blocks and Files Imation's purchase of Nexsan for $120m will be seen as a failed exit for Nexsan's venture capital backers in the eyes of the most ferocious investors.
Nexsan is in the second tier of disk drive array storage vendors, and has found it hard to progress into the top tier. It has failed twice at launching a successful IPO since it was founded in 1999 in Derby, UK. We calculate it's wolfed down…
- 2003: $11m in seed capital
- Dec 2003: $17m in an A-round
- April 2007: $7.5m in a B-round
That's a total of $35.5m, meaning the venture capital backers got a 3.4 multiplier of a return on the $120m Imation purchase price. As $15m of that was in Imation shares, the cash return represents a multiplier of 2.95 for the VCs. In the good times 5 multipliers were possible, so a 3.0 return is relatively piss-poor.
The alternative wasn't particularly brilliant either: the storage startup buzz is in all-flash arrays and cloud storage. Nexsan is not in those areas. It is a traditional disk array vendor that's added flash to its boxes and has object storage technology in its Assureon product line. There are no good IPO prospects here. It's too late.
Imation isn't buying a hot and wild startup. It's got its hands on a mature 13-year-old company with more than 11,000 customers worldwide and in excess of 33,000 systems installed. It has bought its way into the small and medium business (SMB) storage array market and knows nothing about that business in general.
Nexsan's people are staying with the business and, we expect, the main execs have have golden handcuff contracts to stay on. Nexsan's fiscal 2011 revenues were $82m whereas Imation took $1.3bn but made a loss of $43m. We have no word on Nexsan's profitability.
Here is what we understand is Nexsan's revenue history:
- 2006: $5m loss on $42.8m in sales
- 2007: $3m net loss on $49.8m in sales
- 2009: $63m in sales
- 2011: $82m in sales
In its acquisition announcement, Imation said Nexsan has strong gross margins and that its sales are growing. Lord only knows Imation needs a growth business. Its recent financial history is wobbly and its attempts to buy in technology to boost its gutted tape media and optical disk businesses have been small-scale and not delivered any substantial boost to its revenues or prospects.
The chart below shows it last made a profit in the last fiscal 2009 quarter.
Imation's quarterly revenue and profit and loss history. Spot the last profit.
Buying Nexsan is a gamble for Imation: screw this up and it's possible Imation's management won't just walk - they'll be booted out by frustrated investors. Loss-making Imation isn't Nexsan's sugar-daddy. The El Reg storage desk thinks Nexsan has convinced Imation it will be profitable in 2013 and has a product roadmap that will increase sales further. Some of Imation's own distribution channel can take the Nexsan kit and Nexsan's sales partners may be able to take Imation's removable RDX disk storage products and also its security stuff.
Happy new year, Nexsan execs; you've got the VCs off your backs, but now you report to Imation CEO Mark Lucas and he really needs profits. ®
COMMENTS
Math not quite right
The math on VC return assumes the VCs owned 100% of the company, which is unlikely - even if some of the rounds were very dilutive, they probably didn't own more than 70% (the rest owned by founders/option holders). Of course, depending on liquidation preferences, it's possible that the common holders were underwater and the VCs did get the whole pie, although their individual return would very greatly depending on what round they invested in and what the valuation and preference stack was. In any case, it probably wasn't a great exit for anyone involved which says folks just wanted to cut their losses and move on.
I think it was a win-win
I have known Nexsan since the beginning as a channel partner and from what little I know, I think the deal was a win-win. For investors, Nexsan probably didn't grow fast enough to make an interesting exit. After 12 years, I suspect the investors wanted an exit with a decent return - which they got. The problem Nexsan has is their hardware didn't fit a unique enough niche for tier-1 vendors to compete over (same goes for Exagrid now - they have no unique value prop and ultimately very few exit strategy options).
For Imation, they need to leverage their brand as the Nexsan brand alone probably isn't enough to take them to the next level.
One other note: Of all the storage vendors I've dealt with over the years, Nexsan had the best modular storage out there. It's a fast workhouse that never went down. Of all the vendors we worked with, we had the fewest support calls on Nexsan product - it's an incredible value for what it is. From a cost per TB perspective, Nexsan was always near the lowest cost and their annual maintenance costs are also some of the lowest in the industry. It's a well engineered, solid working modular storage solution.
Re: Math not quite right
That seems very good thinking to me. I should have thought of it myself.
Cheers.
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