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Analysis far from backers celebrating anything like a fourfold payout after Micron bought Virtensys, it turns out the sad reality is that Virtensys was close to collapse and Micron is buying the ashes of a crashed startup.

Stockholders will get nothing as the firm avoided a disastrous implosion by the skin of its teeth. The picture we have obtained is that of a startup that ran out of momentum in 2011, lost its CEO, found no one was interested in buying the company and eventually faced either its closure or an asset purchase by Micron – with a hiring of all its employees – pretty much a fire-sale in fact.

Virtensys chairman and CEO John Nicholson told El Reg that this account of events is not true, likening it to a “World War II bomber found on moon” story, although he would not elaborate.

The story of how and why Micron came to be buying the ashes casts light of just how difficult it is to change the way enterprises do their data centre IO.

Virtensys founding idea

Virtensys was founded in Manchester, UK, late in 2005 by ex-Xyratex employee Marek Piekarski. he had the idea that the PCIe bus could be extended outside a group of servers to a switch from which PCIe-connnected peripherals such as Ethernet NICs and Fibre Channel HBAs could be shared by the servers, avoiding each of them having to have their own NIC and HBA.

As virtualised servers became more popular, putting more IO pressure on the servers’ NICs and HBAs, so the Virtensys IO virtualisation and PCIe sharing story gained a stronger appeal.

Tony Palmer became CEO of Virtensys with Piekarski serving as its chief technology officer. Three venture capital firms – SEP in the UK, Celtic Partners in Canada and GMIV of Belgium – put in $12m of A-round funding and product development began in earnest. The investors got board representation and John Nicholson joined the board as well. he was an ex-VP at both Compaq and DEC, acquired by Compaq.

In March 2007 Ahmet Houssein was appointed as the CEO and a US base was set up in Beaverton, Oregon. The board chairman was Andy Roberts. Product developments were encouraging enough for the three VCs to pump in $12 million in a B-round in January 2008 and another $16m in a C-round in August 2009, when the VIO-4000 line of IOV (IO Virtualisation) switches became generally available; Virtensys was engaged in building out its sales structure and product sales with eventual profitability as its goal.

An EMEA VP, Paul Silver, was appointed in October that year to build the EMEA channel structure. Promark was added as a US distributor in January 2010. The EMEA channel programme and initial partners were announced in February.

Things were looking rosy, but two things happened that, with hindsight, were unusual. The EMEA VP left, and John Nicholson replaced Andy Roberts as board chairman. otherwise momentum carried on; NEC started developing a blade switch module with Virtensys technology on the board, and Zycko became an EMEA distributor.

Nicholson strengthened the board by appointing mark Christensen, ex-Intel Capital, and Peter Hayden, co-founder of EqualLogic, as directors. Synopsys, a software and IP designer for semi-conductor companies, became a customer, and Keating Technologies became a Canadian channel partner.

IO Virtualisation did not take off

Behind this momentum an uncomfortable truth was building; it was darn hard to change the way enterprises carried out server IO in data centres. The company’s sales were not building fast enough and Virtensys was running out of money.

A source close to Xsigo said customers comparing Virtensys and Xsigo IO sharing products preferred the Xsigo design as it simply worked better. Another source close to Virtensys said that the products didn’t perform well in a sales sense.

CEO Ahmet Houssein left without fanfare in March 2011 with Nicholson taking over. A couple of months later Virtensys joined the NetApp Alliance Program and started working with Micron, delivering the VIO-4010 which enabled up to 16 servers to share up to 1.6TB of Micron P300 SSDs integrated with a Virtensys PCIe switch. A vCenter plugin was crafted to make it easier for VMware admins to manage that and the other Virtensys switch products.

Behind the scenes of this activity the cash burn was unsustainable. The external US PR agency’s contract was terminated in autumn 2011, and then came the news last week that Micron was buying the assets of Virtensys and hiring the employees, but not buying the company.

A Virtensys stockholder and former employee, who wishes to remain anonymous, told El Reg: “Yes, we were spending money much faster than revenue. yes, we ran out of funding and the choices for the board of directors were to fold up or be acquired. yes, the change in CEO was due to lack of promised revenue.”

Stockholders get zilch

Stephen Spellicy was Virtensys’ VP for marketing and business development in 2010 and 2011. We understand he helped shift the emphasis from IO virtualisation to PCIe-sharing. Commenting on the Micron VIO-4010 deal, he said: “This was my baby, [I] helped position Virtensys with Micron and worked on two solutions: 4010 and future 4012.”

The Micron asset purchase and employee hiring is a good thing, according to Spellicy: “I wish them only the best, they have a much better shot now. Be proud of these guys, it wasn’t easy. It’s a tough sale, changing the way people deploy network infrastructure.”

Now Micron owns its own PCIe flash array technology, enabling it to compete with Fusion-io, TMS, OCZ and other PCIe flash array vendors. no one is saying how much it paid for the Virtensys assets; Nicholson will not comment on the size of the payout.

We have been told that by the stockholder: “Payout for stockholders will be $0. Micron is acquiring the assets and hiring the employees of Virtensys into Micron. The empty shell of a company left over (Virtensys) will owe more money to the bank than the purchase price and there will be nothing left over for the stockholders.”

How much did Micron pay? Nicholson said: “I can’t comment on that; the terms are confidential.” El Reg now reckons it was some way short of the $40m funding that Virtensys received from its three backing VCs.

The conclusion is that Virtensys couldn’t make a success of its technology, crashed and would have burned were it not for the board doing the deal with Micron. Nicholson does not agree with this overall view, but won’t comment on the details. In the view of El Reg the decision by the board to do the deal with Micron and secure the jobs of Virtensys’ employees as well as give its technology a continuing shot at success is highly creditable. ®

Tags: Tony Palmer, Paul Silver, Intel Capital, Stephen Spellicy, IP designer, switch products