The Story behind Digital Shadows

Digital Shadows
The Digital Shadows team December 2014, London


With the next round of financing behind us and a great new investor, Fred Wang from Trinity Ventures, on the board, I thought I would look back at why we invested in Digital Shadows just over a year ago. I wanted to see how our thesis measured up and put a stake in the ground moving forward. Cyber security will be a continued theme for Storm in the enterprise.

Digital Shadows executed its plan incredibly well last year. When we invested they were still fairly early in their business, with mostly European customers and far less history as basis for an investment decision. At that time, the entire company was based in London (and still maintains most of its intelligence operations and development there). Soon after we invested, one of the founders and CEO, Alastair Paterson, relocated to San Francisco to start building the US team.

Looking back at the internal case for investing there were three key reasons that made the investment in Digital Shadows compelling: market, product fit, and team. While variations of these three reasons are the the foundation of all investments, I think it can be helpful to other entrepreneurs to understand the Digital Shadows case in more detail.


As cyber attacks have become more sophisticated and targeted, there is an increasing need for solutions that deliver relevant intelligence about external threats taking aim at organizations. Digital Shadows delivers a scalable data analysis platform, complemented with an intelligence operations team, that tailors intelligence around the customer requirements that are truly unique to their organizations.  They call this approach cyber situational awareness.  While the global security market is very large, this is an example of a new emerging category of solutions as compared to like firewalls, which is much more mature and well understood market. Digital Shadows instead focuses on threats, and potential sensitive data loss, that exist beyond a customer’s perimeter, where most solutions only focus within the perimeter. Digital Shadows SearchLight is a true SaaS solution, bringing with it all the benefits of SaaS which we liked and we knew we could help accelerate. While the total size of their addressable market was an unknown (and still is, due to the crowding and confusion in threat intelligence), the company believes the market opportunity size to be more than a billion today and growing. But what we now know after a year is much more about the target customer profile  (>1000 employees, sensitive data, high profile executives, etc.). This has enabled us to accelerate our marketing efforts and continue to build the right sales and customer success organization. Although it’s still early, the indicators are good.

Product Fit

At Storm we spend a lot of time thinking about product fit. Unless we are explicitly making a seed / pre product investment, we are looking for companies in SaaS that have some initial indicators of fit. To some it may seem that we aren’t taking enough risk. In reality, we are most helpful to companies which have figured out their initial product market fit. Understanding in great detail a customer pain point and delivering a solution against that pain is a critical step in the startup journey before scale. Otherwise, you risk burning through a lot of cash, without results, if you apply venture dollars towards scaling a business before you have a clear product market fit. At the time of the investment, we believed Digital Shadows just found a clear product market fit with more than a dozen blue-chip customers who were paying enterprise amounts for the solution. The company grew its recurring revenues more than 4x in 2015, ahead of the Series A plan and are on track for an exciting 2016.


The founders, who have deep understanding of the market and requirements, were a part of Detica. Detica was a threat intelligence security company that was sold to BAE Systems (a British defense contractor) in 2008. The security industry can carry heavy consequences and doesn’t tolerate impostors. What we saw was a team that had the security chops to sell to a challenging security buyer. We would not make an investment in a security company team that didn’t have this DNA, which is perhaps different than some other areas of SaaS. Looking back, one of the biggest risks Digital Shadows took was believing they could move to San Francisco and build an executive team in the US. Although their network was in London, they were successful in tackling the tremendous task of recruiting and hiring at team in San Francisco. While we helped, the team was able to build a solid foundation in the US in a remarkably short period of time.

It is all still relatively early for Digital Shadows. But if the past year is any indication of things to come, the future looks bright for the business. And our investment thesis – a year into things – looks to be more or less accurate. We’ll see with more time.


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A MetaCloud Journey


Congratulations to the team at MetaCloud. The acquisition by Cisco was announced today. I am obviously very proud to have been involved with the company. It’s something special to have seen the team make it happen since the very first day. It was an incredible journey with the team – as anyone would expect. There is something to be learned from failure, but success at times comes with even more lessons to be learned. And successes certainly are more fun to reflect on and write about for a post.

As a venture investor, I try to constantly learn, improve and do better as a partner. Ultimately, my job is to generate returns for our investors – the endowments, pensions and others that believe in our collective ability at Storm to invest in early stage enterprise companies. My ultimate goal is to make the companies I invest in successful. If I help make our companies successful, good things should and will happen with time. So from that perspective, understanding the how and the what that made MetaCloud a success as a company is an interesting story. Looking back many of the elements that made MetaCloud so successful are universal – like the quality of the team. Sure there are exceptions, but all of these elements make up what every successful company does (it’s certainly my experience) – but each one in a slightly different way. That is what is interesting.

I also want to give a nod to Chris Hipp. I was introduced to one of the founders of MetaCloud, Steve Curry, by our mutual friend Chris. Chris passed away in 2009 unexpectedly – Ashlee Vance (who was at The NYT at the time now Businessweek) did a nice obituary. I wish Chris was still around to see all that was created. It would have made him very happy. Thank you Chris.



So what attributes have contributed to make MetaCloud a success?


  1. Not being wed to the original idea

Sean Lynch and Steve Curry had the original idea of acting like a sort of cloud broker of compute resource. Sean had experienced first hand the excess compute capacity that often sits idle behind large corporate firewalls. If there was a way to enable others to leverage that capacity – and enable a large enterprise with capacity to sell that capacity back to the “grid”, amazing things could happen. Steve Curry and I met many times at the Dutch Goose in Menlo Park to brainstorm about the idea before funding – even pulling in an occasional customer into the discussion. We spent a lot of time going over the idea, talking with potential customers but it quickly became clear to us that the idea of a broker model was just too early for the market. Mostly because if you think about it, the prerequisite for being able to enable this compute brokering is for enterprises to already have effectively what we would call today a private cloud. Those private clouds did not exist then and we are just starting to see them get deployed today. The broker model has merit and likely will exist when the market is ready. You heard it hear first



  1. Build what customers want

The team was very smart to recognize the broker model was flawed early and adjust the plan – otherwise we would have failed.  I am not sure I would call what happened next a pivot so much as carefully listening to customers. Customers wanted a private cloud. The team built what customers wanted – it sounds obvious but building the broker concept technically was interesting and at the time seemed more disruptive than just standing up and managing private clouds for customers. But customers wanted private clouds and needed help designing and operating them. The team decided to deliver OpenStack as a service. Deliver a fully functional OpenStack cloud behind a corporate firewall where the cloud would be fully managed so that there would be no need to have any internal OpenStack expertise. One thing we learned early – and this was critical – was that we needed to make a promise to the customer, if at any time they want to take over managing the cloud themselves, they could do so without cost. MetaCloud would give them a license to everything. Everything. No cost. Zero. This put the proverbial monkey on our back to deliver a solution that never made that choice relevant. It focused the development efforts on managing scale, deployment and operations as well as contributing code back to the OpenStack community. MetaCloud had little incentive to deliver anything proprietary since customers could in theory take it at any time. Poof.  We struggled to explain what this meant to the market and to customers. Is it a consulting business? – no. Is it a distribution I can buy support for?- no. What is it?  The best answer:  it’s a solution.



  1. Delivering a solution not a product

OpenStack as a service. We were able to get a lot of traction in an early market by delivering the right solution versus the right product. Customers ultimately want to get their problems solved so they can focus on their own business. Sometimes products are good enough to deliver against that value proposition or customers may be well equipped to buy just products (think copy machine). The MetaCloud team realized early on that many customers needed a solution around OpenStack. Customers either didn’t have the resources to execute an implementation themselves or didn’t view placing internal resources against a problem as the best use of their own teams. MetaCloud enabled those teams to do even more – focus on the harder problems and scale way beyond what they were able to do on their own. MetaCloud in many ways became part of their customer’s team and we treated the customers as if they were part of our team. It paid off.



  1. Execute. Execute. Execute

The team could execute. If they got the opportunity to sit down with a technical leader, it usually led to a serious sales discussion. I cannot think of a single instance where MetaCloud was the contributor to the issue when standing up a cloud with a customer. We struggled sometimes to get hardware delivered on time or projects got pushed out based on a customer’s new timeline but the team executed. Sean Lynch hired an amazing team of people to help him execute. Customers asked us to get OpenStack running with their NetApp filers? – no problem. Want it to run with EMC arrays? – we can do that. And this was long before EMC, HP and others committed fully to OpenStack. We did a little custom work for sure but we could do it because this team could execute with confidence.



  1. Team had technical credibility with customers

MetaCloud had a tough problem to solve in most sales situations. Infrastructure is not like a sales tool that someone can just try out, roll it out to the team and if it works great, if not it was just some wasted spends. For MetaCloud’s customers, they were making a huge bet not only on OpenStack but also on MetaCloud’s ability to deliver. The team had some technical credibility with some of the early customers by virtue of having worked with some of those team members side by side in other companies but existing relationships doesn’t scale. Technical credibility was critical to success (and I probably underestimated it at the beginning) simply because it was such a major infrastructure decision. I am biased, but I would guess there is not a better technical team on the planet.



  1. Financial prudence and sequencing

When we launched OpenStack as a service, we didn’t have customers banging down the door. The team wasn’t well known outside of the companies that they had worked at before and OpenStack was viewed as an immature project with little hope of success. We had to figure out what OpenStack as a service really meant for customers – how much were they willing to pay? what was the right way to charge? – per core, cpu, server or some other metric? OpenStack was early and as a startup we were not going to move the project forward by ourselves – we knew we couldn’t move much faster than the community. As a result, the company was very careful with our spend until first we really understood what it was we were selling. Then with the first sales hire, Bert, we were very careful to figure out how we were going to sell repeatedly before investing more in terms of sales and not until recently have we really started to ramp up the marketing team. The team was also thoughtful about raising equity.They operated on a shoestring for two years from the start when we wrote the seed check in summer 2011 to the A round which was done in June 2013 with Canaan and Maha Ibrahim. She is a great partner at a great firm. The team then raised a Series B financing last spring and it made sense since we knew what to scale and how to scale.



I am grateful to have worked with such an outstanding team and wish them well in their next chapter of success with Cisco.



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SaaS Metrics

There are others that have spent much more time thinking about metrics in SaaS. I am enjoying watching the community develop better and better ways about thinking about these new businesses. They make up the majority of the models that we are investing in at Storm today.

Dave Kellog, who is CEO at SaaS company Host Analytics, put together a great post titled “The Ultimate SaaS Metric: The Customer Lifetime Value to Customer Acquisition Cost Ratio (LTV/CAC)

I like the fact that Dave is a fan of actually looking at the financial model as well – I think this is critical because any one metric or combination of metrics can be misleading (positive or negative) especially early in a company’s life – but even can cause confusion for public companies. As an entrepreneur (or investor), understanding the model is critical. Its guaranteed to be wrong but it gives you a framework. He references a SaaS metric periodic table from Insight Venture Partners which I thought was creative and generally accurate.

Unlike Dave, I don’t think all four financial statements matter – at least on a regular basis. A statement of retained earnings really doesn’t tell you much about running the business – but cash flow, income and balance sheets do.

He makes the point that one of the best ratios to looks at is lifetime value / CAC. I agree – though with a caveat. The biggest problem with it early on with a business is LTV and CAC are dubious calculations because the datasets are small – and the ratio therefore is just as potentially flawed. And Dave recognizes some of the limitations as well like calculating churn which has another great post on here. But the basic point is right on – a business should value what is willing to pay for a customer (CAC) based in some way to what that customer is worth (LTV).

The CAC ratio captures the cost of acquiring customers. In plain English, the CAC ratio is the multiple you are willing to pay for $1 for annual recurring revenue (ARR). With a CAC ratio of 1.5, you are paying $1.50 for a $1 of ARR, implying an 18 month payback period on a revenue basis and 18-months divided by subscription-GM on a gross margin basis.

Lifetime value (LTV) attempts to calculate what a customer is worth and is typically calculated using gross margin (the profit from a customer after paying the cost of operating the service) as opposed to simply revenue. LTV is calculated first by inverting the annual churn rate (to get the average customer lifetime in years) and then multiplying by subscription-GM.

For example, with a churn rate is 10%, subscription GM of 75%, and a CAC ratio of 1.5, the LTV/CAC ratio is (1/10%) * 0.75 / 1.5 = 5.0.

The general rule of thumb is that LTV/CAC should be 3.0 or higher, with of course, the higher the better.

Happy modeling!

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Surviving Technology Extinction: Mobile, Cloud and SaaS Are the IT Asteroids of our Day

Impact_eventJeff Haynie who is the CEO and co-founder of Appcelerator recently put together a great post with Re/code called Surviving Technology Extinction. It is a great read. Like so many things in life, one can view challenges as obstacles or opportunities. The changing IT landscape is no different. I have made the case before that we are in the middle of a complete rebuild of the IT stack from infrastructure to applications. Its the reason I have written other posts such as my thoughts on Openstack and applications like GuideSpark.

Jeff references a good article from the NYT about how consumers should deal with the complexity of IT choices today and many of the lessons can be applied to the enterprise. I am so impressed with many of the senior IT executives I meet today because the embrace the idea of empowering users and are leading their companies into the next generation of IT services. I completely agree with the strategy to avoid extinction – although it is easier to state in the abstract without any constraints. Regardless, its a great framework and place to start.

Embrace the user

CIOs must recognize the huge productivity gains of providing employees with apps that truly help them perform their jobs better — those that are simple, complete and conform to their lifestyle versus the other way around.

Favor ecosystems over features

The best modern solutions find themselves at the center of a broad, diverse ecosystem as well — composed of groups like developers, as well as software and services companies

Expect openness

Vendors for whom openness is a part of the DNA offer customers more than just lowered risk of lock-in. There is also the ubiquity of skilled resources, as well as the likelihood of a broader ecosystem. Openness and ecosystems go hand in hand.

When it comes to the enterprise, it’s not about just surviving “technology extinction.” There’s a very real opportunity to thrive in these times of uncertainty, simply by embracing the opportunity while competitors dither.

I couldn’t agree more. This is such a powerful force in IT right now. I am counting on some large incumbent vendor’s products going extinct. This creates enormous opportunity for start ups.

Just like the changes that took place on Earth  65 million years ago and resulted in the extinction of the dinosaurs, those same changes also gave rise to an environment where mammals could thrive. Mobile, cloud and SaaS are the IT asteroids of our day.




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Its is a great time in enterprise information technology

I have been an active venture investor for 13+ years. I have never been more excited about the opportunities in enterprise IT. I will post more in the future about Openstack, the cloud, mobile and the changing landscape but Matt Asay of ReadWrite and 10Gen did a great job of summing it up in his article “It’s Official: Legacy Tech Vendors Are in Permanent Decline

With Oracle, IBM, Microsoft and SAP all repeatedly missing key earnings numbers, a clear and troubling trend has emerged.

SAP has missed key financial projections five times in the last 10 quarters. Oracle has whiffed four times in the last seven quarters. IBM has done better, but has tripped over earnings and revenue in the last two quarters. Microsoft? It has gone four straight quarters striking out on guidance for big areas of its business. Across the board these and other legacy vendors blame sales execution or macroeconomic factors.

Perhaps they should instead blame their technology.


The cloud is having a profound effect on everything IT. Trillions of dollars of market share are going to shift hands over the next decade.

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