How a four-year-old startup got Cisco and HPE to invest while turning away $100 million

Cohesity employeesCohesityCohesity employees

A startup named Cohesity on Tuesday announced that it had raised another $US90 million in funding, bringing the four-year-old company’s total financing to $US160 million.

That’s a fairly sizeable chunk of cash raised for a young company that sells enterprise storage software to manage enterprise backups, no less. Enterprise storage is a formerly hot market that’s been hit-or-miss for the past couple years, and that has made venture investors take pause, even Cohesity’s founder CEO Mohit Aron admits.

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 $US650 million cash. And that buy has put pressure on Cisco to enter a data center hardware market known as “hyperconvergence.” This market has impacted both companies’ server and storage businesses because “hyperconverged” hardware bundles up elements of both into one computer server box.

The thing is, Cohesity’s founder, Mohit Aron, is one of the fathers of “hyperconvergence” technology. He was the cofounder of the company that ushered in the market, Nutanix, along with Nutanix’s cofounder and 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, we understand.

Aron told them that 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 and he was “very upfront” 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 their own 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 if it receives any acquisition offers, even from Cisco or HPE.

Turned down $US100 million

Aron was prepared to walk from both company’s 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 $US100 million.

Cohesity Mohit AronCohesityCohesity Mohit Aron

“I said no to more than $US100 million. We were raising $US90. Had we accepted everything, we would be raising more than $US200 million,” he said.

Aron raised $US55 million in 2015, and he says the additional $US90 million in this round is all the money he needs to get the company to cash-flow positive, which he says it is on track to do in 2-3 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.

We don’t know yet what valuation his investors gave his company on this round of funding, although they valued it at $US355 million after the last round in 2015, according to the database that tracks these things, Pitchbook. Cohesity has raised three rounds of funding in total.

As for selling off such large chunks of his young company so fast and leaving himself with a smaller, and more diluted stake, he’s not 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 $US263 million, and the success of Nutanix, he’s not hurting for money.

He also believes that the CEO’s job is to o 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. The company is bigger than me. It’s the lifeblood of a lot of people behind this company,” he says.

“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,” he says.

“If I’m not doing a good enough job running the company, the board should change me. It’s better for my employees, my company and I may end up owning more money, too,” he says.

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