Ignition Partners Talk Cloud Computing and Virtualization—A Crucial Part of the VC Firm’s Strategy
Now that the media craze around cloud computing seems to have died down just a bit, I thought it would be a good time to take a considered look at what one of the Northwest’s most prominent venture capital firms is working on in this space, which is having increasing influence in every area of software and information technology (IT).
Over the past couple of months, I’ve had a chance to talk with a number of VCs at Bellevue, WA-based Ignition Partners, and they’ve shared a great deal of knowledge and insight into how they think about cloud computing and virtualization. What follows is not a comprehensive look at the firm’s strategy, but rather a few thematic highlights that struck me as important to those interested in cloud-based technologies and business models. To an outside observer at least, what Ignition does in this area will go a long way towards determining its long-term success—and to some extent, it already has.
First, a couple of definitions. Cloud computing, as most see it, is about using remote servers run by vendors like Amazon or Google to store and process data over the Internet, instead of buying and maintaining your own local machines. In fact, Amazon’s chief technology officer, Werner Vogels, has a more industry-focused definition, one that Ignition Partners agrees with: cloud computing is “IT as a service,” delivered in a scalable way to multiple customers via the Web.
Virtualization is a related but different animal; it can be thought of as enabling cloud computing, among other things. Ignition defines virtualization as separating software from hardware—and applications from operating systems—so it lets you run multiple operating systems on a single server, for example, or multiple applications on your desktop, all with minimal setup and security hassles. Big companies like Microsoft, VMware, IBM, and Citrix compete heavily in this space.
But back to Ignition. The firm was founded in early 2000 by ex-Microsoft and McCaw Cellular executives, and now has more than $2 billion under management. It invests in both early-stage and growth-stage companies in the U.S. and China, focusing on consumer tech, communications and wireless, and business software and infrastructure. Ignition has received its fair share of criticism in the press, stemming from incidents like the closure of Sotto Wireless earlier this year, and last fall’s accounting scandal at Entellium—both companies it backed.
Yet Ignition is strong enough in cloud computing and virtualization that, given how central these issues have become to most aspects of IT, it seems like a key differentiator for the company. Especially at a time when most if not all venture firms are going back to basics and thinking about where their most valuable expertise lies. Indeed, Ignition’s biggest win to date was in virtualization: XenSource’s $500 million acquisition by Citrix Systems (NASDAQ: CTXS) in 2007 (more on that below).
“This is the next generation of what we believe system software is doing,” says Brad Silverberg, a co-founding partner at Ignition who is on the board of Skytap, a Seattle cloud computing firm. “It’s the next stage of the Internet. Five years from now, everything we do in computing will be touched by virtualization or cloud computing.”
Ignition partner Richard Fade, who sits on the board of Stamford, CT-based virtualization startup InstallFree, says, “It’s a lost opportunity if we’re not deeply embedded in this space. We have a lot of close relationships with thought leadership in the industry.” He cites leaders like Paul Maritz, the former Microsoft exec and current CEO of VMware, who resides in the Seattle area, as well as Microsoft muckety-muck Bob Muglia, who’s president of the company’s server and tools business. “Across the board, we think virtualization has the potential to remake the way servers are deployed and managed. We see a whole continuum of products evolving. Our job is to pick the ones that have significant shares.”
Fade and Silverberg are both former senior vice presidents at Microsoft who helped lead the software giant’s early Internet efforts, among other responsibilities. For the past three years, they have led Ignition’s thrust in virtualization and cloud computing, together with fellow partners John Connors and Cameron Myhrvold.
And how have they been doing? Let’s take a closer look at four of Ignition’s key investments in the space. The following list doesn’t include portfolio companies like Azaleos or OneHub (both based in the Seattle area), which use aspects of the cloud and virtualization for their products, but aren’t creating the core technology:
—XenSource, based in Palo Alto, CA (with a Seattle-area office), was bought by Citrix for $500 million in 2007, as mentioned above. XenSource had developed a type of “hypervisor,” or virtual machine monitor, that allowed multiple operating systems to run on a single host computer. Silverberg says originally there was a “lively debate” within Ignition about whether to invest, because XenSource was a late-stage revenue company. In the end, the venture firm led a $15 million Series C round for XenSource in 2006. All told, the company took less than $50 million in total funding, so the investors (including Ignition) got handsome returns, roughly 10 times their investment.
—Skytap (originally called Illumita), based in Seattle, was founded in 2006 out of the University of Washington. Its technology lets companies manage virtual machines that can handle data storage, processing, and networking for complex tasks like software development and operations testing. The advantage over Amazon or Google’s cloud computing platform is that Skytap works for your existing applications, Silverberg says, without your having to do any special coding to fit an outside company’s model. Ignition participated in Skytap’s $6 million Series A round in 2007, and then re-upped in a $7 million Series B round last March. Skytap has been gaining traction with medium-sized businesses, and recently announced its software is compatible with Windows 7 and corporate networks such as VMware-based clouds.
—InstallFree, based in Stamford, CT, was formed in 2006 and makes business software that solves compatibility and security problems when employees install Windows programs and upgrades on their desktops. Ignition co-led (with Trilogy Partners) InstallFree’s $8.5 million second-round financing in August last year. The virtualization company is “doing really well,” Fade says. He adds that the company has “significant sales and revenues for their first year” and some “big brand-name customers,” which could potentially make it an attractive acquisition prospect down the road. InstallFree also has a partnership with Amazon Web Services to offer virtual applications.
—Xeround, based in Bellevue, WA, has developed cloud computing and virtualization software for database applications, primarily in the telecom industry. Ignition invested in the company’s $16 million Series B round in July 2008. Xeround’s board includes chairman Harel Kodesh, the CEO of Seattle-based Decho and president of EMC’s cloud infrastructure business, and Ignition partner Adrian Smith. The company has partnerships with Sun and IBM to help telecom companies keep their subscriber data and other information in a unified “intelligent data grid,” instead of having it scattered across different databases.
So the jury is still out on three of the four. But it’s a promising group that should have enough cash to get through the recession and focus on their business customers.
It’s certainly still early days for cloud computing, with many different competing models, so evaluating startups requires much due diligence. “There’s a lot of confusion over the definition,” says Chris Howard, an Ignition associate who spends a fair amount of time looking at cloud-based software and services. “Everyone is ‘cloud enabled.’ Are you really about that, or what are you really doing? You have to sort through all the marketing spin.”
Looking down the road, the Ignition partners’ mantra on cloud computing and virtualization is, “No single model wins.” That means consumers and business customers will want different things for different applications. “If you’ve got an existing application, people don’t want to throw it out and start all over. It’ll be a mix-and-match environment. They’ll use some Azure, some Google,” Silverberg says. For now, though, the undisputed leader is Amazon Web Services. “Amazon is winning with an IT-centric approach,” Cameron Myhrvold points out. Silverberg adds, “They’re leading the charge to the next generation of computing.”
So how can Ignition win in the space? “We win if we can help customers win ahead of the big companies,” Fade says. “We have to understand the timelines of the big companies, and where they’re likely to build vs. buy, where they’ll have gaps and need help. We don’t want to invest in places where they’re investing and it will be in Windows Server in six months. We want to be creating complements to the big companies.”
One big question is whether Ignition’s startups will continue to innovate in a difficult climate, and avoid being marginalized by the giants in the field. “We’re still in the recessionary period,” Silverberg acknowledges. “Nobody expects a robust recovery anytime soon. Not before mid-2010 at least. It’s been a pretty painful period, but this is the time when the best companies get forged. We’re cautious, and we’re making new investments. The terms are more favorable than they were in early 2008, for the investor. I would expect the first half of next year will be a very busy time for companies. There’s going to be a huge backlog for companies looking to raise money. It’ll be a tough and interesting time.”
Fade adds, on an upbeat note, “We are so bullish about the Seattle area. It’s very fertile ground, and will continue to be for the next decade.”