Report: Most Storage Startups Flop

Despite the tech bubble bursting, venture capitalist firms have continued to pump billions into storage projects. But most of the VC-backed companies will never see financial success, according to a new report from Crescendo Ventures.

The Crescendo report, "Venture Investing in the Storage Sector: The Cold Hard Facts," shows that VC firms have pumped over $3 billion into more than 150 storage projects over the past three years. This supports Byte and Switch Insiders conclusion this month that, while the sector has also seen a drop in VC funding since the crash, it remains well funded compared with other sectors (see The Billion-Dollar Slump).

But the Crescendo report also predicts that the majority of venture-backed storage companies today won’t achieve the level of commercial performance required to make them financially successful. In fact, the report, which looked at 456 early-stage storage companies over the past 34 years, shows that seven out of 10 storage ventures fail.

And the bad news for VCs investing in storage doesn’t stop there. In order for a VC to achieve its target of at least tripling its investment in a company, the company has to be worth about 10 times the total funding it has received when it enters the public sphere. But of the three out of 10 companies that actually survive, the report shows that only 27 percent achieve a return of 10 times the investment, while 34 percent are worth less than three times the total investment in them.

So, how can VCs spot the winners in that sea of losers? John Borchers, a partner at Crescendo and co-author of the report, suggests that investors take a hard look at what storage segment a company is playing in.