Virsto (A)

Virsto, a storage virtualization company, was founded in 2007 by Mark Davis, Alex Miroshnichenko, and Serge Pashenkov.  Davis founded Virsto after managing a series of technology startups, many of which were ultimately acquired by big name players such as Dell and HP.  Virsto represented the first venture Davis built from the ground up, and it was intended to do for storage virtualization what VMware had done for server virtualization.  At the beginning of Davis’ journey, he and his cofounders faced a daunting decision: slow the pace of product development to wait for the market leader, VMware, to develop the functionality whereby Virsto’s product could “plug in” to VMware’s hypervisor, or go to market immediately with Microsoft Hyper-V, a new entrant with a still uncertain future.  Davis gambled on immediate commercialization via a second-tier player vs. waiting around for VMware.  While his decision brought Virsto to market more rapidly, the team soon found that Virsto’s product far exceeded the needs of Microsoft’s audience.  Therefore, in 2011, Virsto was poised and ready when VMware announced the capability to integrate with external products, and Virsto quickly saw its market potential explode.  VMware, which had been working on its own storage product that had yet to gain traction, saw the tremendous potential of acquiring Virsto to accelerate its storage solution.  As VMware’s interest to acquire Virsto crystallized into an extremely low-ball offer, Davis faced the difficult decision of whether he could negotiate a price with VMware that would make his investors, employees, and stakeholders happy, find another higher-paying acquirer, or allow the company to continue to build market value as the clear leader in storage virtualization.

Part B describes the challenging negotiations that Davis went through with VMware to finally arrive at a price before both sides reached the dreaded “deal fatigue.”  After presenting the price to his board, one board member asserted that he wanted to bring in his own lawyer to negotiate the remaining terms of the deal.  At that point, the board member’s request felt as if it had the potential to undermine the hundreds of hours Davis had spent in due diligence and negotiations over the previous weeks.  After coming this far, he was going to have to decide how hard to push back on his own board member to fight for the issues that were of highest priority to him, versus continuing to push the deal terms towards what could possibly be the breaking point.