Last night HPE added to their HCI portfolio by picking up Simplivity for $650 million. On its face the deal sounds encouraging, but in context, it's actually pretty poor. According to Crunchbase, Simplivity has $276 million invested in them since their start in 2009, with the last round in March of 2015 sucking in $175 million at a reported company valuation at $1 billion. This exit appears to be more out of duress than anything and it's hardly a strategic buy for HPE as Simplivity was pushing their Cisco integration more than anything else. HPE is likely interested in parts of the underlying technology, and sees Simplivity as a route into the enterprise where their HC 380 is more of an SMB/midmarket play. Additionally, HPE offers vSAN Ready Nodes, which is yet another arrow in their HCI quiver as they build a wider portfolio that is designed to compete with the newly combined Dell EMC assets.
Last night HPE added to their HCI portfolio by picking up Simplivity for $650 million. On its face the deal sounds encouraging, but in context, it's actually pretty poor. According to Crunchbase, Simplivity has $276 million invested in them since their start in 2009, with the last round in March of 2015 sucking in $175 million at a reported company valuation at $1 billion. This exit appears to be more out of duress than anything and it's hardly a strategic buy for HPE as Simplivity was pushing their Cisco integration more than anything else. HPE is likely interested in parts of the underlying technology, and sees Simplivity as a route into the enterprise where their HC 380 is more of an SMB/midmarket play. Additionally, HPE offers vSAN Ready Nodes, which is yet another arrow in their HCI quiver as they build a wider portfolio that is designed to compete with the newly combined Dell EMC assets.
Gartner identified nearly 20 integrated systems providers in their October Magic Quadrant report. HPE and Simplivity of course are on that list, but so is most every other storage and server vendor, as well as several niche HCI players. What's interesting however as you dig through each vendor's press releases is that innovation in the HCI space has slowed to a crawl. Sure there are the typical customer wins and the like, but meaningful progress, in aggregate, isn't there. The scramble to gain mind share through innovation by startups a few years ago has stagnated as the smaller HCI vendors realize operating a profitable company after the first 1,000 customers is a lot different than disrupting an industry that's been slow to adopt change.
It's not all bad though. Nutanix managed to go public, even if delayed, which is something most other storage startups have not accomplished. At the end of last year Nutanix claims nearly 4,500 customers and continues to add to their hypervisor-of-all-trades Acropolis. In the race of customer acquisition, VMware's vSAN is the clear front-runner though, topping 5,500 customers last year and on target to top 6,000 when their quarter is reported in a few weeks. vSAN is the most widely distributed HCI offering too, as customers can buy the VxRail engineered solution from Dell EMC, Ready Nodes from server vendors, or they can roll their own with a wide variety of components. This flexibility of deployment, continued enhancements, and the fact that VMware is by far the most popular hypervisor are the clear drivers in vSAN's success. It is a bit curious that Microsoft continues to ignore HCI, essentially enabling Nutanix to own that market segment, but that's a conversation for another day.
Given all of this context my feelings are thus; the Simplivity exit is evidence that investors are weary and aren't finding HCI as a great place to put their money. Rightfully so as it hasn't been a profitable segment for the companies or investors with a very short list of exceptions. We will continue to see consolidation in this space, and likely storage as a whole, as access to capital becomes increasingly difficult and large vendors with deep pockets have few portfolio holes that need to be filled via acquisition. Violin is a mature example; I expect more erosion this year and next as startups struggle to find cash for operations, as the break-even point remains a mirage as they try to scale the business.
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