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How Virtustream founders turned down one acquisition and then sold for 3X at $1.2B

SAN DIEGO — Virtustream‘s founders Rodney Rogers and Kevin Reid were very stressed out when they turned down an acquisition deal with SAP. Instead, they took an investment from the corporate giant, and bet on going it alone.

It turned out to be the right move, as Virtustream was acquired this year for three times the value of its worth in 2013. EMC bought Virtustream, a six-year-old public cloud and cloud software company, for $1.2 billion in May. Rogers and Reid had a very wild ride, and their story, told on stage today at the Intel Capital Global Summit in San Diego, has a lot of lessons for entrepreneurs who would also like to create a “unicorn,” or startup valued at more than $1 billion.

CreditSuisse has counted 109 unicorns among the world’s startups. They have a collective value of $453 billion, and have raised a total of $48 billion. That has led a lot of concern about too much hype in tech investments, with a bubble forming that is sure to burst. But the unicorns have prospered in part because the public markets are so volatile.

So far this year, only 23 companies have gone public, CreditSuisse said. Last year, it was 61. And for the past two quarters, those that have gone public have seen their share prices fall. Virtustream was contemplating going public and were actively preparing for it, but the founders say they made a wise decision in ditching that plan.

Rogers and Reid spoke in a fireside chat moderated by Thomson Reuters reporter Heather Somerville. They were guests of Intel Capital in part because Intel was one of their early investors.

Based in Bethesda, Maryland, Virtustream was the founders’ third startup together. Rogers and Reid had the idea to create a cloud company that provided a public infrastructure for other startups to use. They were hopping on the massive movement of enterprises to take advantage of cloud computing, or Internet-connected data centers that could provide all of the information technology services that companies once kept in-house in their own buildings.

They were outside of the bubble thinking of Silicon Valley, and felt they were late to the market. Their timing was also terrible. On one September day in 2008, they made their first pitch to investors who had bet on their previous company. But it happened to be one of the worst days of the financial meltdown that triggered the biggest economic mess since the Great Depression. With the Dow Jones Industrial Average down 770 points, Reid said that the investors “didn’t notice we were in the room.”

They formally incorporated the company in January 2009, and managed to raise funding. They also put some of their own money into the business of running intensive, mission-critical apps in the cloud.

They got a big stamp of approval when Intel Capital put money into the company in the second round of funding. That helped them grow, even as they were busy coding. Rogers said they didn’t mind that they were not considered a sexy company at the time. But they continued with their mission of disrupting major tech companies, and they kept their courage up to stay the course. In addition to raising venture capital, they also took on debt.

Reid said, “We were based in Bethesda, Maryland, which people call Silicon Valley East.”

Rogers quipped, “Which it isn’t.”

Reid and Rogers said that their pitch to both investors and customers ultimately made sense because it was a sound business with real customers and a sensible business plan.

“Investors are looking for value,” Rogers said. “If you are looking to create enterprise value, look beyond the surface. If potential investors are focused on short-term results, that can be very distracting.”

In 2013, they got into deep negotiations with SAP for an acquisition. But both parties walked away from that deal, and they turned the discussions into an investment. Virtustream raised $40 million, and it turned out to be good for both parties. Rogers said that SAP saw a three-fold return on their investment. Still, back in 2013, it was hard to walk away from an acquisition offer.

“In 2013, we were still really early,” Reid said. “A lot of this has to do with timing. We were just four years old. But you hae to look a the momentum of the company and the industry.”

SAP’s investment gave the company further credibility, and it helped Virtustream get new customers.

As for the current environment for unicorns, Reid said, “The bar keeps getting higher. Everyone wants to raise more money than the others.”

But Rogers said it takes a lot of skill to keep spending enough money to generate value “without incinerating your balance sheet.” He added, “You have to mind that balance every day. Burning cash for the sake of it doesn’t make sense.”

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