Longworth Venture Partners Blog

The world is still buzzing about VMWare a week after its IPO, and the stock is still a bright spot amidst an otherwise jumpy market. VMW is still up a healthy 10% from the opening price. But let’s take a step back from share prices for a moment and study the long view. Longworth is a venture capital fund after all, and we’re all about the 3, 5, and 10 year horizons. So what does the blazing success of VMW mean to venture investors? Certainly, it means much more than just a deep-pocketed potential acquirer of our portfolio companies.

First of all, the market hasn’t seen an IPO this large by an infrastructure company in quite a while. (Not to marginalize Bladelogic’s recent successful IPO.)  Infrastructure is a Longworth focus area, and it’s always a good sign when an infrastructure company makes waves. VMWare’s success is also a good signal for the relatively sluggish IPO market.

Digging deeper, the virtualization market looks to be evolving quickly and accelerating. Both VMWare and XenSource have new liquidity to invest in building out their portfolios, either through acquisitions or R&D. (I would argue that VMWare was comparatively limited while under the EMC umbrella.) Based on the VMWare S-1, it looks like the company will come out of the IPO with net proceeds of around $500M after payments to EMC. Combined with equity currency, this cash gives VMWare a deep pool of capital for acquisition activity. Meanwhile, if there was any question before about the viability of XenSource, it has now vanished. With two (soon to be three) viable hypervisors, the secondary ecosystem of virtualization software - migration, management, security, backup, redundancy, etc. will become even more important than ever for the three to differentiate.

This heterogeneity and competition in the market will drive more innovation by startups and entrepreneurs in the 3rd party tools market. This means more exciting investments for venture investors, and more features for end customers. All in all, we should expect a very active startup, venture funding, and exit environment around virtualization.

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