image The UK Register’s Chris Mellor wrote a short hit piece last week on VCE’s Vblock, entitled “Vblocks bleed out EMC money, VCE = virtual cash erosion.” True to Register form, the cleverest thing about the entire post is the title, but as both Wikibon analysts Dave Vellante and Stu Miniman noted this week, not only was Mellor’s post short, it was short-sighted, missing a great number of key points with regard to the enterprise startup.

For those who don’t know, an 18-month-old VCE is a joint venture primarily between Cisco, VMware and EMC centered around creating a “fully integrated IT offering” that maximizes the product lines of the three companies. Their central product, the Vblock platform, incorporates the best of EMC storage and software, Cisco converged networking, and VMware virtualization.

Mellor wrote in his post that: “we know that EMC’s 10-Q SEC filing says total EMC-contributed funding to VCE is $173.5m, plus $7.8m in stock-based compensation for VCE executives such as CEO Michael Capellas. EMC losses in VCE for the June quarter of this year were $46.6m, with $41.9m in the preceding March quarter.

Mellor went on to pan VCE as a company, rating it as a startup:

“Viewing VCE as a startup it has not been very successful thus far. If it doesn’t make a profit by the end of this year then perhaps EMC, Cisco and VMware might reconsider things. Perhaps they should change from stock-based compensation to stick-based incentivisation [sic]?”

image In other words, you can always trust the Register to be the Register. They come up with very sensational headlines around enterprise, occasionally prop up the theories with some facts; they’re not always the full set of facts, but there are some there to make the position sound plausible.

Mellor Misses the Part about it being a Joint Venture

As Stu Miniman and Dave Vellante pointed out in their posts on the Wikibon research blog, the upside for investment by the joint venture partners at VCE aren’t purely in owning a profitable company.

From Miniman’s post:

While different stacks may look similar at a component level, VCE’s mission is to accelerate change in the IT industry and has invested a significant amount of money and people to assist enterprises, service providers and partners down the “journey to the cloud”. While many early deployments of Vblock were looking for virtualized infrastructure to reduce costs (77% as of January compared to 23% deploying for Private Cloud according to VCE), traction in repeat-customers and service providers are good signs that the business model is attractive.

Changing customer habits is a long and difficult process, but it does appear that VCE is moving the needle. While VCE may be currently running a negative cash flow, the accelerated investment from EMC points towards positive momentum.

Today, Vellante went into further detail:

What Chris’ analysis misses is that when VCE sells Vblocks, EMC and Cisco take income into its mainstream P&L’s. The whole idea behind the joint venture is that the investors take the benefit into their main businesses.

This is critical to get buy in from all the lines of business managers.

Specifically, for example, Rich Napolitano and Brian Gallagher, who run EMC’s VNX and VMAX businesses respectively (and their Cisco counterparts). These executives are happy to support VCE because their divisions recognize income from the JV. If they didn’t, VCE would be viewed internally as competitive. But EMC and Cisco were smart in the way they structured this because internal politics can kill deals like this.

The point is Chris’ analysis ignores the broader picture and simply looks at the cost, not the cost/benefit. I’ve stated several times that in my estimate, EMC gets more than 50% of the revenue from Vblocks.

This analysis from the guys at Wikibon takes in a comprehensive understanding of the impact of a sale of a single unit from VCE to the bottom lines at the investing organizations.

What if we look directly at VCE as a standalone entity, and pretend as if EMC, Cisco and VMware are Sand Hill Road venture capitalists, eagerly eyeing the bottom lines for their investment?

Apples to Oranges: Is VCE Really a Startup?

Michael Capellas on VCE and the industry in January 2011.

One thing both I and SiliconANGLE can stake a reputation on is being plugged into the world of startups. Our primary offices are in the heart of Silicon Valley in Palo Alto, and both the Palo Alto and Dallas offices of SiliconANGLE co-office with other startups. We are both literally and metaphorically plugged in to the startup community.

When we talked to Michael Capellas at EMC World in 2010, he characterized the work they he was doing with Acadia, the predecessor to VCE, as very start-up-ish in nature. Later in 2011, when I was at SxSW in Austin this year, I met Jay Cuthrul in the blogger’s lounge, who without provocation extolled the virtues of the VCE startup culture.

Jay is the Lead Principal vArchitect at VCE, which in true startup style, is a title that’s about a week old. I followed up with him today, in light of the recent questioning of VCE, to see if what he told me then was still his sentiment after having been at the company a little over a year.

In short, it was.

“What makes VCE a startup? Aside from the age of the company, the wild-eyed hours, and tasks that you’re assigned?” Cuthrell fired back. “No one tells you Jay Cuthrell at SxSWi 2008what you can’t do. The expectation is that you’re going to attack a problem that’s never been attacked before, and there’s no ‘it can’t be done’ mindset.”

Startups are like that. SiliconANGLE is only the latest in a string of startups I’ve either founded or been party to. Most startups, in my experience, are borne of a big idea, an inkling of how to solve it, and craploads of man-hours devoted to solving the big idea.

That’s consistent with VCE’s problem-solving style.

“Our approach is akin to ‘I’m going to point you at these trees, now make toothpicks,” said Cuthrell. “Our mandate is similar: go look at a floor at of that datacenter; now go figure out the best way to fill it up [from various variable constraints].”

Cuthrell also described the management and task force style of VCE as very ad hoc and iterative.

The Register Doesn’t Understand the World of Startups

This is a world that the Register isn’t plugged into, nor are they usually responsible to their audience for understanding this. That combined with their tendency towards sensationalism, and it’s not surprising it wouldn’t even enter into their minds that this company indeed truly functions like a startup, nor would the thought to compare VCE’s progress at eighteen months to other startups at eighteen months.

For instance, at eighteen months old, where was Facebook? At eighteen months old, they were still taking venture funding, and hadn’t even bought their primary domain name yet. In fact, they weren’t estimated to be profitable until just this year at the ripe old age of eight years old.

What about Google, another Silicon Valley luminary? They were founded in a garage in 1996, and didn’t even incorporate until two years later. The mainstay of their current revenue engine, Adsense, wasn’t even launched until 2000, four years after the company was conceived.

And then there’s Twitter’s mythical revenue model; the company was founded in 2006, and five years later they’ve yet to present a viable model other than endless amounts of venture fundraising.

Still, if we’re going to discount the ancillary benefits that Cisco, EMC and VMware see from funding VCE and focus purely on the merits of VCE as a startup, comparing an enterprise focused organization to social and consumer tech startups isn’t exactly an apples-to-apples comparison.

Mellor May Not Even Understand Enterprise Startups

The last several years have been fantastic, as someone watching the space as a pundit and journalist. The startup and M&A season last year was particularly exciting, and was an great baptism by fire for me as I oversaw the SiliconANGLE editorial focus-shift from consumer to enterprise.

Kristen Nicole on 3Par Acquisition at #VMworld.

2010 saw the acquisition longstanding iconic tech brand of Novell for $2.2 billion, McAfee for $7.68 billion, Palm for $1.2 billion.

There were also, though, a great deal of startups that sold for quite a sums in the billion-dollar neighborhood. 3Par went for $2.35 billion, Isilon sold for $2.25 billion, Storwize went for an estimated $140 million, Ocarina also for an undisclosed but likely not insignificant sum, Compellent for around $960 million, and Zimbra for $100 million.

 imageIn fact, it was right around this time last year when the 3Par/HP news broke at VMworld last year. Most of the startups in question did not disclose the financial details of their acquisitions or their record-books, but the 3Par deal was analyzed in great detail by most of the punditry, and as a publicly traded company prior to the acquisition, had to reveal their accounting to the public.

3Par, was founded in 1999, and shipped their first product three years later in 2002, so at eighteen months, there was no possible way they could be considered profitable. Indeed, ten years after their founding, they were described by the pundits and analyst to be “questing for profitability,” and finally reached that territory in 2010.

So, even when you evaluate VCE (purely as a startup) and compare them to their enterprise startup peers, there’s absolutely no shame in not being profitable at eighteen months. In other words, even within Chris Mellor’s operating parameters, VCE still isn’t as bad off as he makes them sound.

Research is Fundamental to Online Journalism

This isn’t an entirely dissimilar incident to the one I reported on about a month ago, when Robin Wauters at Techcrunch incorrectly reported that InMobi was stealing top talent from Millennial Media. The problem with Robin was that he was, in the pursuit of quantity and sensationalism, didn’t do any research whatsoever to support his article.

The nature of Robin’s sin was that he didn’t call anyone for comment (not that he makes or takes phone calls anymore), nor did he do a basic Google search. Chris Mellor’s sin was that he pretended to be an expert in startups when he very clearly is not, and in so doing actually throws into question his expertise on the enterprise space at the same time.

The hallmark of a Register signature piece is a snarkily written headline and throwing the subject of the post under the bus towards the end, very similar to the Gawker style of blogging. The key purported difference between Gawker-style blogging and the style of the Reg is that it’s assumed that the author at the Register has deeper subject matter expertise, so that when throw-away snark is employed, there’s some weight behind it.

Sometimes, as was the case with the post in question, the authority is purely implied.

What are the consequences of bad analysis like this? The Register is listed with most news indexes, and as such post like these will show up in most financial analysis (like Google Finance, Yahoo Finance, and other investment filters). Bad analysis affects the market in measurable ways, to say nothing of the general perception of the companies involved.

Why go with snarky analysis? As I said in my analysis of the Techcrunch fail (and countless my prior posts), it all comes down to pageviews. In the CPM journalism model, the audience is not the customer, they’re the product. Conversely, at SiliconANGLE, our business model relies primarily on selling and exploiting data relevant to our audience’s market. Our loyalty is to the facts and providing value (read: analysis) from those facts.

The audience is better served when they’re not a commodity, and the piece from the Register is evidence of that.

[Editor’s Notes and Disclosure: Image of Jay Cuthrell at SxSWi 2008 by Andrewi709, used under Creative Commons license. Photo of Stu Miniman and Dave Vellante credit to SiliconANGLE/Ricky McGill. 3Par rack image courtesy of Wikipedia/Public Domain. VCE isn’t a sponsor or client of SiliconANGLE, but VMware (who has some stake in VCE) will be sponsoring some of our coverage from VMworld 2011 at the end of the month. Thanks to Dave Vellante and the analysts at Wikibon for research assistance. –mrh]