A startup named Cohesity on Tuesday announced that it had raised another $90 million in funding, bringing the four-year-old company’s total financing to $160 million.
That’s a fairly sizable chunk of cash raised for a young company that sells enterprise storage software to manage enterprise backups. Enterprise storage used to be a hot market but has been hit-or-miss for the past couple of years, and that has made venture investors take pause, as even Cohesity’s founder and CEO, Mohit Aron, acknowledges.
But the really curious part of this financing deal is that both Cisco and Hewlett Packard Enterprise became strategic investors.
Those two companies are fierce rivals, and their competition in storage has gotten even more intense of late. HPE recently bought a storage company called SimpliVity for $650 million cash. And that buy has put pressure on Cisco to enter a data-center hardware market known as hyperconvergence. This market has affected companies’ server and storage businesses because “hyperconverged” hardware bundles up elements of both into one computer server box.
Cohesity’s founder, Aron, is one of the fathers of hyperconvergence technology. He founded the company that ushered in the market, Nutanix, along with the company’s CEO, Dheeraj Pandey. SimpliVity was seen as one of the biggest direct competitors to Nutanix.
So, when word got out that Aron was out raising money for his new startup, both Cisco and HPE wanted in, preferably while squeezing the other one out, Business Insider has learned.
Aron told them it was in his best interest to partner with both of them. They each have an enormous sales force, and they each have an enormous roster of partners that could help Cohesity sell its software that manages storage backups to a lot of enterprise companies, Aron told Business Insider.
“They both came to us, HPE and Cisco,” he said, saying he was “very up-front” that “we’ll be treating both equally and we will not be giving preferential rights to any strategic investor.”
They obviously tried to win Aron over to their side. “While there was some initial concern, eventually they both came around,” he said.
That’s because Aron held the cards. As investors, they will be kept in the loop as to “how the company is doing” and whether it receives any acquisition offers, even from Cisco or HPE.
Turned down $100 million
Aron was prepared to walk from both companies’ offers of investment because he was sifting through term sheets from about 30 investors. He had investors lined up to buy a bigger chunk of his company than he and his board were willing to sell, he says. He turned away more than $100 million.
“I said no to more than $100 million. We were raising 90. Had we accepted everything, we would be raising more than $200 million,” he said.
Aron raised $55 million in 2015, and he says the additional $90 million in this round is all the money he needs to get the company cash-flow positive, which he says it is on track to do in two to three years.
“Raising is a distraction,” he says. “We raised enough to get to cash-flow positive and a little buffer. So that’s the thinking behind of raising this much money,” he says.
The valuation on this round of funding is unclear, though Cohesity was valued at $355 million in 2015 after its most recent round, according to the database that tracks these things, Pitchbook. Cohesity has raised three rounds of funding.
As for selling off such large chunks of his young company so fast and leaving himself with a smaller, more diluted stake, he doesn’t seem worried. Between his early years at Google, the sale the next company that employed him as an early employee, Aster Data Systems (bought by Teradata in 2011 for $263 million), and the success of Nutanix, he’s not hurting for money.
He also believes that the CEO’s job is to increase the value of everyone’s shares. “Owning a minuscule percentage of a Google is better than owning a large percentage of a company going nowhere,” he says.
As for the fear that so many startup founders have that their boards could eventually oust them, he’s philosophical.
“I’m not the company,” he says. “The company is bigger than me. It’s the lifeblood of a lot of people behind this company.”
He added: “I don’t fundamentally believe in dictatorship. In a dictatorship, as long as the dictator is doing a good job, it’s all well and fine, but as soon as he does a bad job, no one can question him. No one can move him. The company goes down the toilet. I don’t want that.”
“If I’m not doing a good enough job running the company,” he says, “the board should change me. It’s better for my employees, my company, and I may end up owning more money, too.”