Compellent: Three Guys in a Basement to an IPO

Ever wonder how a tech startup gets from a standing start to an IPO in just five years?  Well, it doesn’t often happen that quickly — or easily(!).  But we actually have quite a strong history here in Minnesota of tech firms that start as just an idea and go on to become big industry players in a relatively short period of time. Going back a ways, my former employers Control Data and Medtronic certainly come to mind. A more recent example would be e-commerce industry infrastructure leader Digital River, now heading for a billion dollars in annual revenue.

Compellent is another Minnesota technology firm that now appears to have an exciting future ahead of it — as a public company, starting yesterday. The founding team is certainly not new to this game — well, the fast-growth part of it, anyway, if not the going-public part.  Compellent is also just the latest in a long string of data storage companies in Minnesota — going back to Control Data in the ’60s, and Seagate, which has had a presence here almost as long as well. (Seagate still employs more than 3000 in the state, and builds its thin-film heads just a few miles from where I sit). IBM’s Rochester, MN facility has long been a center of disk-drive innovation (though Hitachi acquired that business from IBM in recent years). In addition, there are several other storage-industry players of significant size that had their beginnings in these parts: VTC Inc. in disk-drive chips (acquired in ’99 by Lucent/Agere, and now part of LSI Logic)…Hutchinson Technology in disk-drive suspension assemblies (still here, and a public company)….OnTrack Data in data recovery (now part of Kroll, but still here)…Qlogic in SAN switches, which acquired MN firm Ancor Communications (still here)….Imation in optical and tape media….and Veritas (acquired by Symantec) in backup software, still with an office of 500+ people in Roseville, MN.  And that’s just to name a few — I’ll cover another one, Xiotech, below.

We like storage here in Minnesota! It’s like the Energizer bunny…it just keeps going and going, growing and growing!

The Path of Minnesota’s Newest Up-and-Coming Storage Startup
I’ve known many people who are now at Compellent going back several years, and I had an opportunity to meet Phil Soran, the CEO and one the three cofounders, in about 2003, a year after Compellent opened shop — to develop a new, simpler kind of storage networking harware and software system. One of my colleagues at a company where I was serving in an interim role as VP Marketing at that time (which was also a storage-related startup) had worked with Phil at IBM earlier in their careers.  I also know the VC firm that co-led the original round of funding for Compellent in 2002, Crescendo Ventures (with offices in Palo Alto, Minneapolis, and London). So, with that background, I’m going to tell you what I know about the story of how these guys — the three serial-entrepreneur founders of Compellent, who were just working in a basement in 2002 — got to where they are today, a public company with a market cap now hovering somewhere around $1 billion. I think you’ll find it interesting.

Back in the mid-’90s, Phil co-founded Xiotech with John Guider and Larry Aszmann. John and Larry had both previously been executives at Tricord Systems — John was the co-founder and CTO, and Larry was the Director of Intelligent I/O Subsystems at Tricord.  The folks at Crescendo Ventures knew John and Larry from Tricord — where Investment Advisers Inc. (IAI), Crescendo’s former parent company, was the largest shareholder. When they moved on from Tricord, Guider and Aszmann teamed up with Phil Soran to found Xiotech, which developed a storage hub product to alleviate many of the I/O bottlenecks that kept disk-drive performance from keeping up with advances being made in CPU speeds and disk capacity. Xiotech pioneered the concept of virtualization in server utilization, which was very, very forward thinking at the time. The company enjoyed early commercial success before agreeing to be acquired by Seagate Technologies in late 1999 for $360 million. Based on the forward-looking vision and hard work of the Xiotech team, its investors did very well. I know that Crescendo Ventures achieved a return of nearly 11x its investment in less than three years. And the success of Xiotech really helped to re-establish the Twin Cities as one of the country’s leading storage technology centers.

After Phil and his team left Seagate, they wanted to start another company and approached Crescendo about providing first-round funding. Not surprisingly, Crescendo found it very easy to reach a decision to invest in the team again. They had seen Larry, John, and Phil in action before and knew that they had both an exciting vision for the new company, as well as the experience and operational chops to turn the vision for Compellent into a reality.  Over the years, Crescendo Ventures has worked with a number of entrepreneurs who have started multiple companies. Such serial entrepreneurs benefit from a unique blend of start-up experience, grassroots pragmatism, and ambition to do something bigger and better than what they have done before. For all these reasons, as Crescendo tells the story, they were eager to work with Phil, Larry, and John again as they embarked on their second Minnesota storage startup.

What’s Compellent’s unique approach to storage? Here’s how investor site The Motley Fool recently put it:

Compellent develops storage solutions targeted for
small-to-medium-sized enterprises (SMEs). To attack this prickly
market, the company has focused on affordability, ease of use, and
minimal maintenance.

So far, the formula is working nicely. As of the first half of 2007,
revenue doubled to $20.9 million and there are more than 600 customers,
which include Munder Capital Management, Rivals.com, and even the FBI….

…Compellent does have one compelling aspect to its technology: a simple point-and-click interface. In the age of Amazon.com and Facebook, this may seem like a no-brainer, but it’s hardly common
in the complex world of storage. That gives Compellent one important
differentiation…

So, what role did Compellent’s lead VC firm play in the company’s early years? Crescendo Ventures not only enabled the firm to grow quickly and build a strong market presence, by providing the company with its initial funding (they co-lead the Series A with El Dorado Ventures). It has also been active at the board level since the beginning, and, as good VC firms always do, has engaged its entire team to add value for Compellent. Over the five years since the founding, at least three different Crescendo Partners have been actively involved as directors. Jeff Hinck (now with Vesbridge Partners) led Crescendo’s investment in Compellent (with Charles Beeler of El Dorado ventures), and provided valuable support in the company’s early days. More recently, Crescendo’s Jeff Tollefson (Minneapolis based) and David Spreng (Palo Alto based) have also served as Compellent directors.

Is an IPO an End or a Beginning?
So, now, we have a new public tech company in Minnesota — something our technology community can and should be very proud of (specially how it performed on opening day!).  I suspect, however, that both the founders and their VC backers are not stopping long to pat themselves on the back.  The real work, the real growth starts now.  But, what’s next for Crescendo Ventures, the Minneapolis-born VC firm that still has close ties to its hometown. They tell me they remain very interested in Minnesota and are actively seeking new early-stage investments here. Though most of the firm’s people are based in Palo  Alto, two of its five partners are Minnesotans, along with other professional staff who are from the state.  And I know for a fact that the firm always says it has a soft spot for exciting projects in the Twin Cities!

Stay tuned for more about Compellent, as its growth story plays out this year and beyond, and also for more about how Crescendo Ventures intends to continue to help build growth companies in our state. [Note: I’m proud to say that Crescendo has been a client of mine from time to time, even going back some 17 or 18 years if you count when I first worked with their original parent firm, IAI.]

UPDATE (10/14): To add some clarification.