Virtualization Remains A Hot Market For Startups
July 27th, 2007 by Jason Yau
With all of the buzz about the upcoming VMware IPO and the money the business unit is generating for EMC, virtualization has lately been one of the hottest topics on finance and tech media outlets everywhere. At Longworth, we have been actively searching for new investments in this market, and the success of VMware underscores the market opportunity that we see for startups. Indeed, while VMware and others have snapped up many small companies to cover more ground in the expansive periphery of the core VM technology, we still see many nascent areas of the market that VMware, Microsoft, and XenSource haven’t fully covered yet. In addition we expect the infrastructure giants like IBM, HP, BMC and CA to beef up their infrastructure and management product lines to cover virtualization.
First, some Longworth history. As virtualization began to ramp back in the early part of this decade, we recognized application virtualization and server-based application streaming as an attractive, adjacent market opportunity that would ease the application management and delivery headaches of IT organizations. In 2002, we backed portfolio company Softricity to enter this market. Softricity was eventually acquired by Microsoft in 2006. In 2004, we invested in Marathon on the basis of its innovative use of virtualization to present multiple synchronous physical servers as a single fault-tolerant asset.
Back to the present, it’s now clear that the use of virtualization within the enterprise has become widespread though largely dominated by VMWare to date. As XenSource and Microsoft ramp up their hypervisor implementations, and IBM and HP enter the fray, we expect the VM market to become highly competitive. Therefore, the large infrastructure vendors will be forced to compete on value added features above and adjacent to the VM layer such as management, high availability, interoperability etc. In addition, competition should lead to more heterogeneity in the market as VMWare’s dominance diminishes. These two factors create a unique opportunity for smaller vendors to extract value by developing tools and applications above and around the VM stack.
Indeed, our research shows that IT will demand robust ancillary software for handling everything from planning to migration, monitoring to auditing, and provisioning to workload optimization. With so many management areas to cover and so many potential acquirors, we expect the acquisition transaction flow to be healthy as the market consolidates over the next 5 years. We are already seeing dozens of startups stepping up to the plate to fill that void, and we’re looking forward to continuing to play our role in the evolution of the virtualization market.
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