Formation Data Systems exits crowded software-defined market

Formation Data's recent demise shows the challenges startups face in differentiating products in a crowded software-defined storage market, industry analysts say.

The recent demise of Formation Data Systems illustrates the difficulties that startups face in differentiating their products in the congested software-defined storage market.

Formation quietly ceased operations on May 16, according to sources familiar with the vendor's situation. The quiet shutdown surprised many in the industry, because software-defined storage (SDS) is considered a growing market and Formation had leaders who were well-known in the storage world.

But industry analysts do not view Formation Data's downfall as a harbinger of the fate of the software-defined storage product segment in general. Market research indicates continuing growth for SDS, as revenue flows away from traditional external storage systems.

SDS products hold the potential for enterprises to save money, gain flexibility and avoid vendor lock-in by running storage software on commodity, off-the-shelf servers. The technology is designed to manage storage without dependencies on the underlying hardware.

Formation Data Systems software could support block, file and object interfaces, and it could dynamically tier data across flash-, disk- and cloud-based storage distributed across hundreds, if not thousands, of server nodes. Enterprise product features included continuous data protection, quality of service to prioritize I/O and throughput for specific application workloads, and the ability to recapture unused storage capacity in virtual servers.

Storage experts who judged TechTarget's Storage Product of the Year competition rated the FormationOne software entry so highly in functionality, innovation and value on paper that the product won the 2016 silver award in the server-based storage category.

Formation Data Systems also boasted a veteran executive team. CEO Mark Lewis spent more than 30 years in the storage industry, including a five-year stint as a CTO at EMC. Lewis was one of Formation Data's founders in 2012.

Formation Data Systems raised $24.2 million through July 2016, led by Pelion Venture Partners, Third Point Ventures, Dell Ventures and Mayfield Fund. But the company failed to attract enough additional investment to stay afloat.

Following a rush to fund flash and cloud storage startups in recent years, investment in storage companies has slowed over the past year or so. Formation Data apparently fell victim to that reduced funding throughout the industry.

"Funding for infrastructure companies has been more challenging lately. Money that used to go into the VMware or OpenStack ecosystems is now flowing to cloud ecosystems," Stu Miniman, a senior analyst at Wikibon Inc., based in Marlborough, Mass., wrote in an email. "Storage is going through big changes, and there are opportunities for SDS solutions to gain ground, but it is also a crowded marketplace."

IDC is projecting $9.1 billion in SDS revenue for 2019. Eric Burgener, a storage research director at IDC, said SDS revenue pales in comparison to the projected $51.2 billion for the overall storage market in 2019. But he said IDC agrees with venture capitalist Marc Andreessen's prediction that software, ultimately, is "going to eat the world."

Still limited use for SDS

But, for now, Burgener said few organizations use SDS for mission-critical applications. He said software-defined storage usage tends to be for select workloads spanning business and content applications, structured data management, collaboration platforms and structured data analytics.

The slow shift to new-fangled software-defined storage models may not have happened fast enough for startups like Formation Data Systems. In IDC's fall 2016 storage user demand survey, the top reasons for not using SDS included difficulty in gaining approval for such a new concept, concerns about the performance impact on applications and inability to gain agreement about IT stakeholders.

Startups also face mounting competition, as long-established major vendors move into the SDS space. Burgener noted that Dell EMC, IBM and Hewlett Packard Enterprise have SDS products, and NetApp is due to follow suit.

"Four or five years ago, you couldn't get a good cloud integration story from guys like EMC and IBM. You had to buy a separate gateway, and it was very complex. A lot of the software-defined guys built things like that into their regular products," Burgener said. "Now, that's something you typically see as part of the major product offerings."

SDS market to consolidate

With so many SDS players, analysts expect to see market consolidation and vendors dropping out. But the Formation Data Systems shutdown caught many by surprise.

"There's a number of SDS companies that emerged in the same time frame, which makes competition really fierce, as investors start to expect some kind of return on their initial investments," Steven Hill, a senior storage analyst at 451 Research, wrote in an email. "Some VCs [venture capitalists] go into tech looking to capture lightning in a bottle and are disappointed when they find out that some technologies are more of a marathon than a sprint."

Based on everything I had seen, I thought they had great technology.
Scott Sinclairsenior storage analyst, Enterprise Strategy Group

Scott Sinclair, a senior storage analyst at Enterprise Strategy Group Inc. in Milford, Mass., said the company's research shows "tremendous" interest in SDS. But he said vendors need to address the overuse of the term software-defined storage and find a way to articulate their products' value beyond traditional storage systems. He said Formation sought to enable infrastructure consolidation through a single storage layer that could manage a hybrid cloud architecture, while others merely "load software on hardware" into "more of a traditional storage array."

"Based on everything I had seen, I thought they had great technology. I was very impressed with the executive staff and the people there. I thought it was fairly early for them to close their doors," Sinclair said.

Signs of trouble?

A year ago, Formation Data Systems claimed to have 15 customers either testing its product or doing proofs of concept, but the company struggled for public references. Marc Staimer, president of Dragon Slayer Consulting, speculated the lack of reference customers might have been a sign of issues with the product.

"I've been working with a lot of startups in my career. Here's the most likely scenario from my point of view why they shut the doors: They weren't able to do what they said they could do on paper, or the product was buggy. And as a result, they weren't getting sales," Staimer said. "They were very quiet. That's usually a sign there's trouble on the development side."

Formation's website is still live, and company's major financial backers continue to list Formation under their current investments. Attempts to reach them for comment were unsuccessful.

"Any time you're funded from a VC, they're funding you for the exit, not for you to grow into a viable profit-making company. They're funding you to either go public or get bought," Staimer said. "The public market is pretty thin today for storage companies. To get bought, it's gotten thin, too. The big players aren't buying anyone anymore."

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