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Paul Sherri Cruz; Staff Writer 19 February 2001 1321 words Phil Soran and Larry Aszmann were next-door neighbors with little in common except an affinity for technology. So Soran, a tennis buff who worked for Prodea Software, and Aszmann, a gear head who worked for Tricord Systems Inc., often would compare notes and swap information. The two began toying with an idea in 1995, scheming in the driveways of their Eden Prairie homes, but they soon worked their way into Soran's unfinished basement. Then John Guider joined the basement brain trust; he was Aszmann's former boss at Tricord. Shortly after that, the storage-area network company Xiotech was born, beginning its economic life in humble surroundings much in the same way that tech giant Medtronic Inc. of Fridley began a generation ago. Xiotech quickly grew out of Soran's basement and within five years computer disk-drive maker Seagate Technology Inc. snapped up the pioneering storage-area network company for a whopping $360 million. The deal was completed in January 2000. The storage-area network industry, which emerged about two years ago, is one of today's hottest technology sectors. The Internet is driving the need for businesses to store and back up more information than ever before, including graphic-intensive data and high- resolution images. Now a subsidiary of California-based Seagate , Xiotech is growing and gearing up to compete against established market players such as IBM Corp., Compaq Computer Corp. and EMC Corp. And it all started with three guys in a basement . The trio hashed out the
business plan in the Sheetrocked headquarters that doubled as Soran's daughter's pretend restaurant. She played waitress and served plastic lunches while they tried to raise enough money to move above ground. After clinching their first $1 million in "angel" funding in 1996, they subleased a 28,000-square-foot space in Eden Prairie. Altogether they raised $38 million from nine investors and venture capital firms, enabling them to get the product - a 5-foot-tall black box filled with disk drives - to market in 1998. St. Paul Venture Capital lists Xiotech as one of its best investments to date. Asking for feedback As Xiotech grew, it added another neighbor to the team - Sue Hogue - who had been observing from across the street. She started as a consultant and signed on as chief financial officer in 1997. Xiotech, which derives from "extended input/output," began with the concept of a "storage hub." They took the idea to 10 technology luminaries and asked for feedback, also knowing that these people would make great investors. "If you go for feedback instead of asking for money, it works a lot better," Soran said. Many of those early advisers ended up investing, he said. Soran draws a picture to describe the storage-hub concept to investors. "You've got to pretty quickly explain it to them," he said. Here is Soran's picture: Imagine a bunch of personal computers networked together, tied to a bunch of servers. With the huge demand for storage, picture those servers sharing a storage box, which holds not megabytes or gigabytes of information, but terabytes - 1 trillion bytes.
Using a concept they call virtualization, each server easily can store or retrieve any amount of information it needs regardless of the individual servers' operating system (Linux, Windows NT or Unix, for example). But it wasn't the technology that sold the investors. It was the management. Paul Bockley, a retired Honeywell employee, and three other former Honeywell workers invested a total of $250,000 in Xiotech. "Some investments are good. Some investments are great," Bockley said. "We did very well." A solid combination "It was a high-risk investment," he said. "Our biggest concern was a major company with more resources would at any time preempt the value of this product." That didn't happen. The founders - with a solid combination of technology, fund- raising and marketing skills - were able to raise enough money early on, which helped them get the product to market quickly. There was a lot of horsepower among the three men. Guider, an engineer, was a founder of Tricord Systems in Plymouth and led the development of its server product line. Before that, he was responsible for the hardware development at Star Technologies and was a manager at Sperry Corp. He is Xiotech's chief operating officer. Aszmann, the firm's chief technology officer and an engineer as well, designed and developed the proprietary software used at Tricord. He also worked for Star Technologies and Control Data Corp. Xiotech CEO Soran held management, marketing and technical positions at IBM for 10 years, and was vice president of Eden Prairie- based Prodea
Software (later bought by Platinum Technologies Inc.). That's where he acquired his fund-raising skills. "They are smart, hard-working, good guys," Bockley said. In addition, "they were tightfisted with spending our money." They didn't have fancy cars, large offices or huge salaries. "They were running on a shoestring," he said. But not anymore. Boom times Seagate 's investment in Xiotech and its position as a pioneer in the industry has set the stage for Xiotech to reach $1 billion in sales within the next few years, Soran said. Xiotech's current estimated sales are approaching $100 million, but company officials declined to be more specific. The storage services market is estimated to become a $40 billion market by 2003, according to International Data Corporation, a national research firm. Storage service spending was about $21 billion in 1999. "The market we're going after is just huge," Soran said. Some of Xiotech's customers include North Central Oil Corp. of Houston, CUNA Mutual Life Insurance of Iowa and St. Cloud-based Nahan Printing. While most of Xiotech's customers are small- to mid-tier firms, the company is now going after Fortune 500 companies as well as government accounts and private businesses. It's not surprising that Seagate was looking to expand into storage systems. Disk drives are Seagate 's bread and butter, and Xiotech's black box is filled with Seagate disk drives. After researching several storage-area network companies in 1999, Seagate decided to invest in Xiotech, which was preparing for its initial public
offering. But Seagate went one step further. Steve Luczo, CEO of Seagate , invited Soran to his home in Jackson Hole, Wyo., and shortly after, Seagate bought Xiotech, which then had 80 employees. "We felt they were the kind of people we wanted to work with," said Tom Mulvaney, Seagate senior vice president of Internet solutions. Since Seagate is now a private company, it's easier to invest in acquisitions because it doesn't have to worry so much about keeping Wall Street analysts happy, Mulvaney said. "We don't have to manage on a quarter-to-quarter basis," he said. In January, Xiotech moved into a 83,000-square-foot space in the technology-dense Golden Triangle area of Eden Prairie. Cubicles are being built to accommodate its rapidly growing staff. "They've really invested in us," Soran said, adding that while Xiotech reports to Seagate , it still operates independently. And now that Xiotech is out of the basement and flying, things are a bit quieter in the neighborhood. Aszmann has moved, but Soran and Hogue still live in the same houses in Eden Prairie. "Once we come home, we try to talk gardening and snow shoveling," Soran said. Entrepreneurs, the sequel; In 1995, three men gathered in an Eden Prairie basement and launched Xiotech Corp. Five years later they sold it to Seagate for $360 million. Now they're at it again. Star Tribune (Mpls.-St. Paul) Newspaper of the Twin Cities Sherri Cruz; Staff Writer
7 August 2002 Xiotech founders Phil Soran, Larry Aszmann and John Guider took a year off after selling their 5-year-old data storage company to Seagate for $360 million. They traveled to France and Ireland, sent kids to college, got a little grayer, watched kids get married, bought luxury cars - and then decided they wanted to do the startup thing all over again. They're entrepreneurs after all, and "entrepreneurs entrepreneur," Soran said, stealing one of Guider's lines. "There's always something to invent," Guider said. So the three descended again into Soran's basement - where they had started Xiotech seven years earlier - and began scheming. Only things in the basement were a little different this time. Instead of Sheetrock walls and cement floors, Soran's basement is carpeted and the walls finished and painted white. There's a huge TV, a pool table, foosball and a treadmill. And the men all looked rather comfy sitting on the beige leather couches and chair telling their story one recent morning. But it was an ordinary poster-sized whiteboard they bought that helped shape their creative brainstorming sessions. They came up with all sorts of ideas, even low-tech ones such as starting a storage locker business. Eventually, they returned to their technological senses and created a data storage-related software product. After incorporating in March, Compellent Technologies climbed out of the basement last month with each founding member reprising their Xiotech roles: Soran, chief executive officer, Aszmann, chief technology officer, and Guider, chief operating officer. They even tapped Sue Hogue, former Xiotech chief financial officer and Soran's neighbor, for part-time CFO duties. Recently, they took over the offices of a failed startup - furniture included near the Home Depot store in Eden Prairie. A detailed description of Compellent's product, however, will have to wait. Compellent's software will be in development until the end of next year. To
keep potential competitors in the dark, Soran describes it as "revolutionary" and "the next step in storage architecture." The product will compete in the data storage market but the technology, they say, is radically different from Xiotech's product, a hardware/software combination that allows companies to store and back-up large amounts of data. Compellent will market its product to mid-sized companies. Getting advice After they solidified the idea, the team did what they did with Xiotech; they bounced it off industry luminaries. "That's always real interesting," Soran said. Sometimes what excited the founders didn't excite the luminaries and vice versa. All of that feedback was incorporated into the business plan. The next obstacle for Compellent was getting funded, a tough task for many new outfits today. Nationwide, only 80 out of more than 1,600 venture capital investments were initial funding for startups, according to a recent PriceWaterhouseCoopers/Venture Economics/ National Venture Capital Association Money Tree Survey report. And this year in Minnesota, not one startup has received seed funding. Until now. Crescendo Ventures, based in Minneapolis, and El Dorado Ventures of Menlo Park, Calif., invested $9 million in Compellent. Charles Beeler, general partner with El Dorado Ventures, said his firm invested primarily because of the management team. "They are stand-up people, people that you enjoy working with," who have experience even prior to Xiotech, Beeler said. Guider, an engineer, was founder of Tricord Systems and worked at Star Technologies and Sperry Corp. Aszmann was a software engineer at Tricord, Star Technologies and Control Data Corp. Soran held management and marketing positions at IBM for 10 years and was vice president of Prodea Software. Xiotech was the team's first endeavor together.
Another reason El Dorado invested was because the team executed Xiotech's business plan so well. El Dorado will probably make more investments in Compellent, Beeler said. El Dorado typically invests $15 million to $20 million over the lifetime of a startup. Crescendo, one of the original investors in Xiotech, was sold on the team and the concept. There isn't any competition right now because the product is unusual enough, said Jeff Hinck, general partner with Crescendo. Of the team, he said Soran is a natural leader, and Aszmann and Guider are technically strong. One Xiotech investor that didn't invest this time was St. Paul Venture Capital. Michael Gorman, a partner with St. Paul Venture Capital, said the firm doesn't comment on companies that they don't finance. Employee-centered Once Compellent was funded, the management team turned its focus toward recruiting product design engineers. While most people attribute the team's achievements to the founders, Soran, Aszmann and Guider attribute their future and past success to their employees. An example of their employeefocused approach is the way they exited Xiotech. In the late-night deal closing meetings between Seagate and Xiotech, the management team bargained on behalf of its employees, enabling them to share in the wealth, said Dan Carr, CEO of the Collaborative. "They were the reason it all worked," Soran said. At first the Compellent founders thought they would need a headhunter, but they quickly found recruiting was a lot easier than it was when Xiotech was getting started. They found engineer Ron Seeman - unemployed. He used to work for Terago Communications. "It was closed down," Seeman said. Steve Cady was unemployed for the first time in his life when he was tapped for the job. In fact, all 12 engineers were unemployed for about six to seven months before being hired by Compellent. Many of the engineers were refugees of Tellabs, which closed its Minneapolis office, and Envoda, a software company that
ran out of money. The engineers agreed that working for a startup these days isn't any riskier than working for an older company. Next up was finding space, which also was easier than they'd expected. They leased a corner of a 16,500 square-feet office with the option of taking over more space as the company grows. Compellent plans to have 40 employees after one year and 80 after two years. Xiotech employed about 365 people and had estimated annual sales of $100 million when Seagate acquired it. Compellent's goal is to be much bigger than Xiotech, Soran said. Xiotech then... - Recruiting a software engineer was as hard as finding a leprechaun. - Finding office space that was reasonably priced was as hard as finding a dot-com that didn't offer free soda to its employees. - Three smart, hardworking Midwesterners thought they could build a better mousetrap. ... Compellent now - Recruiting a software engineer is as easy as finding a mosquito on the lake. - Finding office space that's reasonably priced is as easy as tracking down a dead startup and making a deal. - Three smart, hardworking Midwesterners think they can build a better mousetrap.
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