Most startups enjoy discussing their growth rates — but not their revenues. That’s because they’re tapping the law of small numbers — a company with small revenues can more easily post eye-popping growth rates than much larger incumbents.
Nevertheless, it is worth investigating whether the fast growth is happening for a good reason — and therefore whether it signals that they might be offering customers a much better value for the money than do incumbents.
This comes to mind in considering the cloud storage service provider — a $50 billion industry expected to grow at a 22.3% compound annual rate to $137 billion by 2025, according to Research And Markets.
Wasabi, a Boston-based cloud storage provider, recently borrowed $27.5 million to boost its growth. In a January 28 interview, CEO David Friend told me that the company has “more than tripled in the last year.”
Wasabi’s fast growth springs from doing five things right:
- Friend has an effective Follow the Leader mindset
- The company aims to become “large and socially important”
- It has a clear strategic focus — providing cloud-based data storage and access for small and medium sized businesses (SMBs) through channel partnerships
- It grows faster than the industry by offering a better service at a much lower price
- As it scales, its costs drop and it invests to capture new growth opportunities
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AWS More Than Twice As Large As Azure
Amazon’s AWS — which dominates the cloud industry — is targeting a much larger market than cloud storage. In December, AWS CEO Andy Jassy said that AWS’s revenues reached $40 billion in 2020 — up 33% from the year before, according to GeekWire.
AWS says it controls 45% of the $371 billion (2020 revenues) cloud infrastructure market — more than double the share of its closest competitor, Microsoft Azure. And it sees enormous growth potential since 96% of the estimated $3.6 trillion in global IT spending has not yet shifted to the cloud, Jassy claimed.
Microsoft’s Soaring Cloud Business
Microsoft’s Azure is growing faster than AWS. On January 26, CEO Satya Nadella pointed out that its commercial cloud run rate was a forecast-topping $66.8 billion, according to ZDNet — 34% more than the prior year.
In Microsoft’s second quarter, its Azure unit increased revenue by 50% and its forecast for the third quarter topped the consensus by $2.5 billion. Daniel Ives, an analyst at Wedbush, said that remote work [which is prevailing during the pandemic] is good for cloud services providers and that workloads in the cloud are expected to rise from 35% in 2021 to 55% next year.
Wasabi’s Rapid Growth
Wasabi, is growing much faster from an undisclosed revenue base. Wasabi offers “infinite” cloud-based data storage and access at 20% of its competitors’ price “with no complex tiers or unpredictable egress fees,” according to the company.
Wasabi was founded in 2017 by serial entrepreneurs Friend and Jeff Flowers who started Carbonite, and took it public — the company was sold in 2019 for $1.4 billion. Last August Friend told me that Wasabi’s revenues would “triple without even trying in 2020.”
That’s what he said happened. In 2020, its total storage expanded 150%, annual revenues increased over three-fold from the previous year, while its customer base increased to more than 21,000 businesses [more than double the 10,000 it had signed up in February 2020, according to Blocks & Files].”
Friend says that when people are working from home, it is difficult to create the social cohesion that the company enjoyed before the pandemic. As he explained, “We have 126 employees and I have not met 40 of them. We have grown so much and we are burning through social capital. We usually do well in the Boston Business Journal Best Places to Work competition but this year not enough people answered the survey. We can’t meet in the cafeteria or have face to face sales meetings.”
Wasabi — which has raised a total of $140 million in capital — recently borrowed $27.5 million at undisclosed terms from MGG Investment Group to build more data centers. Friend explained that Wasabi has a predictable revenue stream which appeals to Wall Street lenders. He seeks equity to finance marketing and sales.
Friend made it clear that selling equity is to him a much more costly form of financing Wasabi’s growth. “We are a hypergrowth company with decent margins and are valued on a multiple of revenues. If we double in size next year, I can raise money at half the cost as this year.”
Friend didn’t disclose Wasabi’s current valuation. He told Boston Business Journal earlier this month that Wasabi hit a $230 million post-money valuation when it closed its last round of equity financing in May 2020.
Here are five key elements propelling Wasabi forward.
Strategic Mindset: Follow the Leader
The way a CEO thinks can have a big impact on a company’s performance and prospects. As I wrote in my book, Goliath Strikes Back, there are two CEO mindsets that can lead a company to success. The first — dubbed Create The Future — is the way Amazon CEO Jeff Bezos’s mind works.
AWS is an example of that mindset. As I wrote in 2018, Amazon created AWS by selling to companies the computing services it started building in 2000 to run its e-commerce operations. Not only did AWS mark the beginning of the cloud services business, Jassy’s leadership has kept it way ahead of rivals.
I think of Friend as having a Fast Follower mindset — he attacks markets pioneered by others. As he said, “When Zoom was started, it disrupted WebEx — which was owned by Cisco — and other incumbents. When we started Carbonite, there were 15 incumbents including Iron Mountain, EMC, and HP HPQ . We blew them out of the water with a better business model.”
EMC was among the pioneers who convinced Friend to create superior business models. “What we are doing is a well-worn strategy. EMC went into IBM’s IBM market 25 years ago and offered a plug compatible disk drive at 30% less than IBM’s price. Customers resisted buying because they said ‘you can never be fired for buying IBM.’ But customers found that they could plug in EMC’s product and save 30% without missing a beat. U.S. Steel used to be the largest company in the U.S. in the 1960s, Nucor NUE introduced arc furnaces and now U.S. Steel is gone,” he said.
Company Goal: Become a Societally Important Company
Wasabi aims to become an important public company. As he said, “Our equity offers a great return on investment. We want to become a big company that is influential and important to society. We want to do an IPO in a couple of years and keep going. All the world’s data is moving to the cloud — the market will be in the trillions of dollars.”
More specifically, he expects Wasabi to hit the $1 billion threshold — “very possibly” within the next 24 months. “Eventually — meaning three or four years from now — we will either be public, or some big public company will buy us,” he said. “If we stay on our own, since we could take advantage of the public markets, we’d probably think about going that route,” he told Boston Business Journal.
The biggest impediment Wasabi now must hurdle to meet that goal is to raise enough capital to sustain its rapid growth. As Friend explained to me, “Three months ago I promoted someone inside the company to chief operating officer so I could spend full time developing relationships with investors. Our growth is being limited by our ability to raise and deploy capital. I have to find an investor who shares our vision: No customers leave us; they [store and access] 60% more data every year; and our cost to store the data drops 20% a year.”
Product/Customer Focus: Data Storage As A Service For SMBs Via Channel Partnerships
In contrast with AWS, Wasabi sells its cloud-based data storage service through partners who help SMBs integrate “best of breed” cloud infrastructure services. Wasabi’s growth continues to be fueled by its “more than 4,000 channel partners and 350 technology partners and its ongoing expansion into new geographies and markets.”
Customer Value Proposition: Better Service At 20% of AWS’s Price, Higher Channel Margins
Wasabi positions itself as a better, less expensive version of AWS’s Simple Storage Service (S3). As I wrote last August, Wasabi is a focused low cost producer. Specifically, it offers SMBs S3-compatible public cloud object storage — one of AWS’s many services — at one-fifth of the price.
Wasabi also says its service outperforms S3. Wasabi’s competitive superiority flows from benefits such as “lightning speed but [Wasabi provides] no numbers [to quantify that speed]. [Unlike AWS, Wasabi imposes] no egress or API charges, which should help any cost comparisons with AWS,” according to Blocks & Files.
Wasabi also grows faster because it offers the channel much better margins than rivals do. “VARs make 3% reselling AWS. EMC offers margins of 10% to 11%. Two years ago I was at our booth in Las Vegas. I was trying to convince a reseller to sell 100 terabytes of Wasabi instead of EMC. He said that EMC paid him his commission up front; whereas Wasabi paid him a 20% to 30% margin — in smaller checks [over time.] We would pay him, say, $10 over the next five years but EMC would pay $8 up front. He chose EMC because he had no intention of staying at that reseller long enough” to make the Wasabi sale pay off for him. So we changed our compensation plan to make it more compelling for resellers.”
Value Delivery Engine: Cut Price, Boost Efficiency, Capture New Markets
Wasabi sees itself as creating more use cases by driving down the price of storage. In pursuit of the small and medium-sized businesses that are tapping into those new use cases, Wasabi sees value in working with value-added resellers.
As Friend said, “AWS goes direct to the customer and it offers a closed system with lots of different services — none of which are best of breed. The channel can pick the best of breed for customers and tie them together. We hire people to train 4,300 channel partners who have relationships with the customers. We have a price advantage over AWS — all the other little companies we competed with have fallen by the wayside.”
Wasabi is able to identify new growth opportunities among its customer base thanks to its channel council made up of its key VARs. Among these new trends is “surveillance. There are 800 million surveillance cameras that capture images requiring 200 petabytes of storage — it is all stored on customer’s premises.”
Wasabi comes up with new services to take advantage of these opportunities. As Friend said, “How do we do this? We have a great development team that knows about storage.”
If Friend can find the right investors to finance its growth on mutually acceptable terms, Wasabi will grow into a significant player.