IVCA Feature: Highlights of the 2016 IVCA/NVCA Luncheon, Featuring a Panel entitled ‘Cleversafe: Building a ‘Unicorn’ in Chicago’

IVCA Feature: Highlights of the 2016 IVCA/NVCA Luncheon, Featuring a Panel entitled ‘Cleversafe: Building a ‘Unicorn’ in Chicago’

April 27, 2016

The 2016 IVCA/NVCA Luncheon took place on April 13th in the Burnham Room of the Chicago Club, and the large gathering anticipated the annual coming together of the Illinois Venture Capital Association (IVCA) and National Venture Capital Association (NVCA) for a summary of Venture Capital and Private Equity issues. The luncheon featured “A View From the Hill,” an overview of legislative issues, by NVCA President & CEO Bobby Franklin, and a panel discussion regarding the development of a Chicago web-based storage company, “Cleversafe: Building a ‘Unicorn’ in Chicago.”

The 2016 IVCA/NVCA luncheon was sponsored by legal firm Ropes & Gray, LLP and accounting/advisory firm Baker Tilly. Representing Baker Tilly was (Partner) Bill Chapman, who remarked, “Baker Tilly is very pleased to once again be sponsoring the IVCA/NVCA luncheon [ninth year].” Greg Metz, Partner at Ropes & Gray added, “We’re very thrilled to be a sponsor of this IVCA event [seventh year].”

View pictures here.

The second part of the IVCA/NVCA luncheon was a panel that was a case study and story on the development and success of Cleversafe – a web-scale object storage solutions company based in Chicago. The panel included:

  • MODERATOR: Lee Mitchell, Managing Partner of Thoma Bravo, and current IVCA-PAC Chairman
  • Chris Gladwin, Founder and former CEO of Cleversafe
  • Peter Barris, Managing General Partner of New Enterprise Associates
  • Chris Galvin, Chairman, CEO and Co-Founder of Harrison Street Capital, LLC
  • Jim Dugan, Co-founder, CEO and Managing Partner of OCA Ventures

Lee Mitchell: Chris Gladwin, what did you hope to achieve with Cleversafe, and how did you plan to do it?

Chris Gladwin: I started Cleversafe in 2004, and there were a few considerations at work. First, it was about the amount of digital information the world was going to create and that was just going to grow, and the value of it was going to grow. Back then, the world was somewhat still a paper world, but that has obviously changed in the last 12 years. If you looked at the way that companies stored information at that time, it hadn’t changed in over 50 years, stuck in a telephony world that had been replaced. So there was going to be tremendous demand, and the approach the world was using was not going to meet this demand.

I also looked at the existing competitors in this space, there was no history of innovation, and there were some incumbents that wanted to protect their old ways of business. That combination was ripe for disruption. There was the importance of the growing problem, and we didn’t see the people who could solve it.

I had a background in wireless and networking communications, and if you look what had replaced telephony – the internet and wireless communications – there had been solutions to that problem in scale. I felt strongly that if you took the methods that made the internet and mobile phones work, and applied them to the problems of growing storage scale in importance, that there would be a solution.

Mitchell: What was the early reaction?

Gladwin: In the early days of Cleversafe, when we presented that idea to people, most people thought we were crazy – it would never work, it was too slow and it wasn’t how things were done. For all of us, the more we heard how crazy it was, the more we knew we were right, For me, I thought if everyone thinks it’s crazy, no one else is working on it – that’s exactly what we wanted.

That’s how the idea started, and today people use Cleversafe everyday without even knowing it. Customers are massive enterprises that are the largest data producing organizations in the world, so when you apply things like photos, movies or financial transactions on your phone or computer, many of those systems are Cleversafe.

Mitchell: Another differential was that you were going to develop new technology, to become a patent organization as well as a product organization. What was the thinking behind that?

Gladwin: At one level, it sounds like a very simple idea – take all the data from the internet and telephony and apply it to storage – it turned out to be a very hard problem to solve. And it just wasn’t one idea application, it was thousands. Cleversafe had over one thousand patents when IBM bought it.

In 2004 and 2005, there was a huge trend in the industry to outsource everything, and in contrast we didn’t want to outsource anything. I wanted all the developers to be in the same room. We built the whole team here, and the thinking behind that is if you’re going to write the 10,000th web page or the 40th version of a particular driver, you could outsource that, because the problem definition is pretty straight forward.

In our case, when you’re doing something truly different, you’re going to spend more time in the problem definition regarding design, rather than the actual coding. Software creation is the easy part, we spent more time at Cleversafe on performance testing than we did on writing the software. So much of the work, when you’re doing something innovative, is to have smart people communicate and learn from each other, and I felt very strongly if we’re going to be the best in the world on that, then we needed colleagues that actually communicated with each other. That’s why we built it here.

Mitchell: And that here was Chicago. What was the thinking behind that?

Gladwin: I just felt that here we could recruit a higher quality of colleague, and retain them. One of our partners at the time was a guy from Boston, and he would meet with the various teams. At the end of the day he was very complimentary regarding those teams. He told me he maybe could hire one or two of our quality, but not thirty.

So it was our ability to track down those people, and keep them. From a retention point of view, the average stay for an engineer in Silicon Valley is two years. At Cleversafe, it was closer to six to eight years. The was a huge difference. When you ask me why I established an atmosphere like that, I selfishly wanted the company to do better. We realized we had a unique and sustainable advantage in building a team here.

Mitchell: Jim Dugan, you saw the potential of Cleversafe early. What factors that you identified made this an attractive investment for OCA Ventures?

Jim Dugan: I got to know Chris [Gladwin] in 2004, in a meeting at his apartment in Lincoln Park. The conversation was about his former company, Music Now, and the experiences he had gained from it. So it became an ongoing conversation, and Chris pulled me aside, as the discussion switched to how his experiences would apply to this dispersal of digital storage.

I was blown away by his intellectual honesty in his prior experiences. At the start up stage, there was only alpha code, but our investment in early 2005 was a result of this ongoing relationship. At that stage, you’re looking for three principle things. It starts with the caliber of the entrepreneur, and Chris was A-Plus in that category, and more importantly was completely transparent in his issues. In every respect, that constitution held up, even through adversity, with Chris Gladwin.

The next principle is disruption. How significant could these patents and products be? We did some consulting, and was told basically if it worked it could be dramatic, and only get better as it grows, because data sets only grows. And the third part was the economic value of that. Disruption is one thing, but how big and meaningful is it? We didn’t exactly know that, but intuitively there were other companies that were significant in this arena. Bottom line, there were very talented people impressed with the concept.

Mitchell: So Chris Galvin, you invested in the company and later joined the board and served as Chairman. What was it that attracted you to Cleversafe?

Chris Galvin: I got a call from a provost at the Illinois Institute of Technology, and he told me it was classic technology in the Motorola category [Galvin’s family founded Motorola]. I had a meeting with Chris at IIT, and he describe the concept to me, and after 45 minutes we were in. It was easy because I had the good fortune of being born in a family that had the experience of doing things that other people said would never work. Paul Galvin, my grandfather, discovered that if you tried to compete in known markets, you would get crushed by pricing and competition.

Mitchell: And did you see the potential of these patents and products?

Galvin: We thought it would be big if we got to develop the IP, which we did. The board before us, before we came in, allowed Chris to start over. He had literally hit the wall on one of the architectures for this innovation. And I saw the potential for bringing in some former Motorola executives and other expertise to help the company scale. That’s what interested me about it, and that’s why I made the investment.

Mitchell: And that brings us to Peter Barris, and how big NEA has become. Since you’ve had so much experience in these types of investments, what situation did you see, that allowed you to judge how to invest in Cleversafe?

Peter Barris: There is no magic, we look at businesses the way most people look at businesses – the horse and the jockey. Often people ask which is more important, well, they are both important. This was clearly a big market, data was growing at a rate of 10X every five years, and we had previously invested in similar companies, so we were clearly focused on the storage industry.

When you have a fund our size, we need to invest in businesses that have an unlimited upsize. People always observe that we have a big fund, therefore we must invest lots of capital. Well, we’re just like anyone else, we’d like to invest 100,000 and make a 100 million – it’s not about the capital in, it’s about the capital out. So the question is how big can the business grow, and can the market support it. And we believe that the market could support Cleversafe.

In the case of the ‘jockey,’ we knew Chris, we had invested in Music Now. We lost money on that deal, but we recognized what a great entrepreneur he was. That was an easy decision. We were excited about the market and the entrepreneur. The technology was about the information dispersal algorithms that Chris invented. We liked the fact that regarding storage, it could happen in real time. And there is also storage that could hang around, ready to spring into action. That is where Cleversafe was, and nobody else was focusing in those directions.

We also liked the fact that it was Chicago based. We’ve done a lot of investments in Chicago, and in many ways it’s easier to build a company here. There is great and loyal talent, without the issues of Silicon Valley. Those are the principle reasons for our participation.

Mitchell: Venture has a longer ‘runway’ than Private Equity, and NEA came back to invest in the last round for Cleversafe after seven years. What was the reasoning behind that?

Barris: This investment was actually unusual for NEA, because it first came to us from somebody who left the firm. It went to our West Coast partners, and they brought me in because of my Chicago connections. We co-sponsored it internally, but it was a passive investment, we didn’t take a board seat initially. We participated in three rounds, and all told put about five million into it.

I got intimately involved about five years ago. I got to know Chris a lot better, and was inside the tent to see the potential, and the traction the company was getting with customers, even though it was slow going. Seven years in, and it was five years behind its business plan. There was a lot of skepticism in the firm, but it was clear it was going somewhere because it had a marquee customer in Shutterfly. The technology had crossed the chasm, and now it was a matter of getting more marquee customers. The momentum was there, and we stepped up and put another 23 million into Cleversafe, for a total of 28 million, and led the ‘D’ round.

Mitchell: What were the high points and the low points in the years of Cleversafe’s development?

Gladwin: The high point was around when NEA was going to make that bigger investment. We had Shutterfly as a customer, and that company transformed Cleversafe. To put this in perspective, Cleversafe’s sweet spot is selling systems that are 10,000 terabytes and above. When we started Cleversafe in 2004, there were probably five companies at that level. So there was effectively no market when we started, with no possible customers.

But the theory was that eventually all enterprise customers would move into that space, and we’re going to be the best at it, and the other products would not be able to get there. So the first one that came in was Shutterfly, and the system we sold them was a 100 times bigger than any other customer before them. That was a highlight.

And then, right before the ‘D’ round, we had what we called were the ‘Fantastic Four.’ There was Shutterfly, Sky from London, the Japanese phone company PDI and a confidential U.S. company. When we got them, I personally felt ‘we got this.’ These were 100 million dollar opportunities, that would just keep growing every year. It became, at that point, very competitive. The customers were sophisticated, and were vetting all of our competitors, and we just crushed everyone. That’s when I knew that if we land those customers, we got this. And that was a highlight. Of course, the IBM thing was pretty good, too.

Dugan: There were many moments throughout the deal. Chris, I remember the board meeting where you told us to gather around, we’re going to watch a ‘recompiling’ – because it is one thing to realize the dispersal side, breaking data down to modes – but   it was the recompiling that would be a test. You played the ‘Lord of the Rings’ film, and it  was recompiling from about 11 nodes throughout the world. It recompiled with no latency or interruption – we were watching the movie. That was a eureka moment, we had the recompiling, and that could be dramatic. That was the moment of technical efficacy that we had funded.

Galvin: In dealing with completely new technology, it takes time for the customer to even get used to it. There is no framework for them, and their purchasing departments have different variables. And businesses, as we have learned over the years, tend to hit the wall in complexity and scale at these intervals – ten million in sales, 50 million, 250 million, two billion, ten billion, 25 billion and 100 billion in sales, although not many companies get there. But each time you hit those forks in the road, everything changes as far as complexities, organizational structures, capital, management philosophies and more.

At each of those intervals, it requires a different type of talent. Over the years, we’ve cultivated a leadership supply system. For example, at Motorola, I oversaw the top 3000 people when we had 150,000 total employees. We wanted to slot them into positions at the perfect time, with a perfect set of problems that cultivated their skills. So as we went on with Cleversafe, the dilemma was how do we create from a spectacular idea an enterprise data storage company whose potential customers had up to 40 billion dollars in sales, and scale up the underlying field, sales and management teams. We had to struggle to get there. That was an example of some of the hard times.

Barris: The challenges are not unusual. If I look at the biggest successes at NEA over the years, the preponderance of them had bumps in the road, and didn’t have a straight line to success. When you have an innovative, disruptive technology – where a small company is trying to sell into large enterprises – and you’re handling mission critical data for your customers, we had a bit of a push back. It was slow going, and there was some frustration with the management team and the board.

The activities at the market level weren’t happening as well as we’d hoped, and that frustration led to non-aligned interests at the board level. The priorities were different, and I would not say there was alignment amongst the board and the board management. That can lead to a de-focusing of the company. I’ve seen companies get destroyed by board non-alignment. It wasn’t as acute with Cleversafe, but we were experiencing the frustration since progression was going so slowly. But we also had good people, and we added some people to the board. Over time, we learned to align our priorities, and that made a lot of difference.

Mitchell: When you all started did you intend to build a public company, that would be of interest to any number of strategic acquirers, or did you think about exits at all?

Gladwin: In the early days I really was thinking about building a long-term private company, but I didn’t understand the dynamics of it. The original vision of the company was to build a technology to store all the data in the world. We had always planned to be huge. As the company started to grow we worked with investment bankers, not necessarily with the intention to sell, but to learn. We had some analysis done about how enterprise storage worked. There were six or seven big companies that controlled all the market through distribution, and then there were five or six product lines that they each had one of, about 50 different product lines that represented a 40 billion dollar business.

None of those products lines were made by the company that held them. There were either the original product line from decades ago that had been repurposed or something they acquired. So the whole industry has a dynamic where a few massive incumbents pretty much grow through acquisition. So it’s extremely hard for a leading technology company to stay a small or midsize company – you either grow or you’re out. If we were going to do our fiduciary duty, our likely outcome was acquisition. It became something we learned as we operated the business.

Dugan: An exit wasn’t on the radar for us. When we funded Cleversafe I was 35 years old, and I’d been in venture capital for six years, and had never worked at a big company. We were just thinking big, because everyone said if it worked it would be big. Cleversafe was the deal I grew up with, for 11 years. It was a learning experience, but I didn’t go into thinking it’s ‘X’ valuation, and I had come from a financial world. It was all about ‘build it,’ and faith in Chris, who never relented.

Galvin: I initially thought it could be independent, and become the next great Chicago technology company, because the originality of the idea lent itself to a patent acceleration business start up, and we gave them their first job to work on the IP for Cleversafe. When we sold it to IBM, there were 360 patents, with another 450 in the queue, so it was well protected. Bottom line, we created shareholder value, which is what we were supposed to do, and it worked out great for everyone.

Barris: Similarly, we don’t invest in things that we don’t think will go public, for reasons that Chris Gladwin outlined for this particular market – as late as leading the Series ‘D’ funding, we had this discussion. When we were considering putting up the 23 million, we did think that this company had a shot to be an independent company. But whether it ended going that way or not wasn’t the important thing, we saw acquisitions in the market and we thought we might have that opportunity.  It was about scaling the business, and having the market inform you from there.

Mitchell: Chris, I once heard from an entrepreneur to only take money from pessimists, because they never expect it back. What were your lessons?

Gladwin: I feel like I’ve had 10,000 lessons, both general and specific. But that also relates to the biggest lesson on why Cleversafe succeeded. It’s ultimately about the people, and also to have a culture of learning. What Cleversafe did was get better at learning than all our competitors. We learned at all levels  – the board, the management and at the employee level. We got more capable in the market, and that was the key to our success.