• United States

Nimble tech startups find ways to navigate the pandemic

News Analysis
Jun 30, 20206 mins
Data CenterTechnology Industry

From remote data-center commissioning to strengthened e-commerce, some tech startups and their investors find opportunity in the COVID-19 global economic disruption.

iot security startups hot rocket lock security
Credit: Who_I_am / Getty Images

The economic devastation of the global COVID-19 pandemic has many businesses fighting for survival, but dealing with chaos and uncertainty comes with the territory for a certain category of business: Startups.

They thrive on disruption (or at least that’s the message they pitch to investors), but is the lean, move-fast-and-break-things model one that can survive global disruptions?

Unlike retail, travel, and tourism that have been hammered by the downturn, data-center and networking businesses have fared better, with some such as teleconferencing seeing spikes in demand.

Other networking sectors, however, haven’t done as well. Recent data from Synergy Research Group finds that the Ethernet switch and router markets fell to a seven-year low in Q1 2020. Meanwhile, several incumbents, including HP, IBM, and Dell, have announced layoffs, restructuring, and/or hiring freezes.

In contrast, for operationally lean startups unencumbered by legacy support constraints, networking startups have some advantages. As virtualization of everything has accelerated during pandemic quarantine, networking and data-center startups find themselves positioned in fast-growth market niches and discovering more opportunities, less competition, and an abundance of available talent.

And a little luck never hurts.

Timing and cash matter

The timing of investments can be critical to startups that are always running on tight budgets, and for NGD Systems that timing couldn’t have been better. The NVMe storage startup closed a $20 million Series C round in February. “We were extremely fortunate,” said Nader Salessi, NGD Systems’ CEO and Chairman. “No one could have foreseen this, but this new funding is the fuel we’ll need to get through this crisis.” (See our profile of NGD Systems in “10 hot HCI startups to watch.”)

With a little breathing room, NGD Systems has been able to transition most of its workforce to telecommuting without any major interruptions. “Like everyone else, we’re learning how to adapt as we go, whether that’s replacing physical meetings with virtual ones, or watching webinars rather than attending conferences,” Salessi said. “Now, even though we still have a few employees who must physically come into the office or the lab, 90% of our team is working from home without any major impact to day-to-day operations.” 

Mark Fernandes, Managing Director of Sierra Ventures, says the current downturn reminds him of the dotcom and housing-crisis recessions. “Those were great times to fund startups,” he said. “Investors probably saw 50% greater returns in ’09 than in the next few years.”

The reasons are simple, he said. Recession-born startups select for certain types of risk takers, the ones who don’t shy away from adversity and who thrive in emerging markets. If those risk takers attract capital, they then don’t have to hunt far and wide for top-tier talent.

“In recessions, new companies start with the right mindset,” Fernandes said. “They’re leaner, more entrepreneurial, and they have the flexibility needed to jump on new opportunities.” Fernandes sees several sectors exploding right now, including telehealth, video conferencing, e-commerce, and cloud computing.

In the early weeks of the pandemic, as governors initiated stay-at-home mandates, Sierra Ventures paused to triage its portfolio, zeroing in on those companies that would need an immediate cash infusion to get through the year. “The cash-management plan quickly became the operating plan,” Fernandes said.

But after that short pause, the firm got back to investing in early stage startups. Investors know that if they get too cautious in times of crisis, less risk-averse competitors will pluck deals away from them. “We’ve made eight investments since the first of February,” Fernandes said. “Four of those were with entrepreneurs already in our pipeline, but the other four deals were new ones that we handled entirely remotely.” 

Turning on data centers

With everything from daily stand-up meetings to doctor’s appointments to grocery shopping moving online, the surging demand placed on infrastructure goes much deeper than the network layer, all the way down to the data centers that house the infrastructure that makes virtual work possible.

Data-center providers want to add more capacity, but those trying to accelerate their deployments are smashing into an obstacle: commissioning.

Data-center commissioning, a physical process that can’t be accomplished in the traditional way because of social distancing mandates, is the final step before a new data center can be brought online. The commissioning process tests everything from electrical systems and backup generators to switches and backhaul. It typically involves a large on-site team crammed into tight spots throughout the data center to conduct tests, monitor equipment, and gather data.

 “None of this is possible right now,” said Nancy Novak, Chief Innovation Officer for Compass Datacenters, a startup founded in 2011 that has built more than $4 billion worth of data centers around the globe. “The experts who do this often have to travel by plane to the site, and even with some flights resuming, many key people are in self-isolation or quarantine, so getting them all on-site at once isn’t possible.”

Without commissioning, however, the data centers can’t be put to use, and if they can’t be put to use, those sunk costs quickly transform from good investments to financial anchors.

To clear these hurdles, Novak and her team came up with a new process of “virtual commissioning.” Relying on only a handful of socially distanced people on-site, they figured out a way to manage the 133 steps of the commissioning process with an array of gadgets, sensors, and cameras that feed information over the Internet to team members who manage the process remotely from their home offices.

This process has been used to commission a facility in Raleigh, N.C., and has proved so effective that the company plans to continue using it even after social distancing is no longer necessary.

Every day is Black Friday

Webscale, a startup that provides cloud infrastructure for e-commerce, is in the fortunate position of seeing a surge in interest because of the pandemic. “E-commerce is booming,” said Sonal Puri, CEO of Webscale. “Half of our customers tell us they are having Black Friday-scale events pretty much every day.”(See our recent profile of Webscale as one of “10 hot business continuity startups to watch.”)

This is a good problem for them to have – if they can meet the demand.

Businesses like Webscale and their e-commerce clients prepare all year for Black Friday, the day after Thanksgiving and the biggest shopping day of the year. But the widespread quarantining hit without warning, stressing e-commerce infrastructure in ways few could have predicted.

“This crisis created unplanned availability, scalability, and security demands. We never fully tested the capabilities of our infrastructure until now,” Puri said.