Differentiating in a Crowded, Commoditized Market

In the summer of 2007, one of our partners was introduced to Intronis, a sleepy online backup company from New Jersey. Coincidentally, I had been researching the online backup market, so I was invited to work on the deal. At the time, Intronis had been around for a few years, had started growing rapidly and was exploring the possibility of raising expansion capital. They fit or exceeded all of our financial criteria for investment and had never raised venture funding before. Seemingly, the company was a perfect expansion stage investment candidate for us.

When it was first discussed at the investment committee, though, a number of people expressed strong reservations about the deal. The objections were centered around the idea that online backup was a very crowded and competitively saturated market that was quickly heading toward commoditization. Further, Intronis didn’t have much IP and its services weren’t very differentiated from the competition. The reasoning of the objectors was solid, and their arguments were valid. The market was teeming with competitors, from EVault and Iron Mountain on the enterprise end, to Mozy, Carbonite, and a plethora of others on the small business/consumer end. Further, new entrants like DropBox seemed to be popping up every week. Where was there room for Intronis? And how could it possibility gain enough market share to become a big, profitable business that would generate a good return for us?

A few months after that passionate investment committee meeting, we wired Intronis $5 million. How did we get there? Going into due diligence, we knew that Intronis sold its services through three channels – direct to customers, through referral partners, and through managed service providers/resellers that could white-label the product. After performing customer cohort analysis on these different channels, we found that the economics of the reseller/MSP segment were phenomenal. End users (the MSPs’ customers) had very low attrition rates, support costs for those customers were minimal (the MSPs did most of the support), and the revenue from each quarterly reseller cohort increased over time because resellers were constantly adding new customers, and those customers increased the amount of data they backed up every month. This meant that even if Intronis didn’t add new resellers, it’s monthly reseller revenues would continue growing. Further, these MSPs loved Intronis and were highly incented to sell it to their customers. By reselling Intronis, MSPs got a reliable monthly recurring revenue stream and great margins that improved as the MSP sold more storage. Further, by white-labeling the online backup service, MSPs added a veneer of stability and establishment to their businesses.

That’s how we got to October 1st, 2007, the day we invested in Intronis. Two and a half years later, Intronis is exclusively focused on its MSP business and building a product that MSPs can easily market, sell, and support. Intronis has more than doubled its MSP business each of the last two years, and their growth is accelerating. To this day, Intronis is one of the only online backup providers that allow its resellers to white label the product. We all knew the market was crowded and that it would be difficult to differentiate Intronis’s product. Luckily for us, Intronis had considerable differentiation in its distribution model, and we were able to quickly recognize it, form an investment hypothesis around it, and help Intronis capitalize on it.