Despite having been acquired, Zerto was a failure that its leading executives and Venture Capital board members let happen, despite a litany of repeated signals that the business would not meet its potential.
HPE’s purchase of Zerto for $374 million closed on September 1st, giving HPE superb disaster recovery technology that was, according to sources, mis-sold and mis-marketed for years by executives who mis-read the market — and a board asleep at the wheel that let them do that.
Disaster recovery startup Zerto was founded by Ziv and Oded Kedem, two bothers and engineers, who had previously been involved with another startup — Kashya, a continuous data protection and ‘snap’ replication business. Kashya was sold to EMC for $153 million and became part of its RecoverPoint software. It devised replication-based disaster recovery technology for virtualised servers — VMware first and Hyper-V in 2014.
Let’s check out an overall Zerto timeline, its financial backers and board, and then take a look at what happened.
- 2000 — Kashya founded by CEO Michael Lewin, COO Yair Heller and CTO Ziv Kedem. Oded Kedem was Storage Group and then SW Development Director.
- 2006 — Kashya sold to EMC for $153 million.
- 2009 — Zerto founded by Ziv and Chief Architect Oded Kedem.
- 2010 — Gil Levonai becomes VP Marketing and Products.
- 2011 — $6 million seed/A round, $15 million B round.
- 2013 — $13 million C round.
- 2014 — $25 million D round and 200 per cent year-on-year sales growth.
- 2016 — $70 million E-round and 100 per cent sales growth over 2015, 2200 customers.
- 2019 — Moves into backup.
- 2020 — $33 million in equity financing and $20 million debt facility, staff layoffs.
- 2021 — Acquired by HPE for $374 million against total funding of $162 million + debt financing.
Backers and board
Zerto VC backers: CRV, Access Ventures, 83North, Battery Ventures, Harmony Partners, IVP, RTP Ventures, and U.S. Venture Partners.
Zerto board members:
- Erez Ofer — a founding partner of Greylock IL, now 83North.
- Jacques Benkoski of USVP.
- Ken Goldman — former chief financial officer of Yahoo!.
- Mark Leslie — managing director of Leslie Ventures, a private investment company.
- Oded Kedem — Co-founder and Chief Architect.
- Scott Tobin — General Partner at Battery Ventures.
- Ziv Kedem — Co-founder and CEO.
Overall product strategy
Zerto sold its disaster recovery product at a premium price to enterprises. Sources tell us it was an excellent product that met a real need and was expensive to buy. But Zerto management didn’t understand the staying power, potential and relevance of the cloud. They focussed mostly on perpetual license sales and embraced neither subscription business nor SaaS with any fervour.
We were told that many customers used Zerto for mission-critical applications, which is good, but only mission-critical applications — which is not. There was no effective land-and-expand strategy to provide DR to non-mission-critical apps. They used basic replication instead. Other customers who could have used Zerto’s DR shuddered at the price and moved on.
As the public cloud idea gained continuing and growing traction, Zerto did not realise that the subscription model provided an effectively lower entry price for its premium cost product. Zerto leadership was wedded to the perpetual license idea and embraced subscriptions late and without fervour.
We have been told that Zerto leadership never really understood the cloud, thinking it a fad initially — even though it sold through cloud service providers.
These factors provided an opportunity for competitors to catch up with its technology, such as Cohesity, Rubrik and Veeam. Their less-costly offerings started making waves with customers. When the cloud tide rose Zerto started drowning. One person told us that they doomed themselves once everybody started going to AWS and Azure. Zerto’s prices were so high it was over.
Although Zerto grew like topsy in its glory years — 2013 to 2017 — the seeds of future troubles were sprouting. They sapped Zerto’s growth increasingly from 2018 onwards, ultimately leading to layoffs in 2020. It had more than 200 sales people in the glory years, but this had fallen to less than 40 at HPE acquisition time, falling by more than 75 per cent.
This appears to be a sustained marketing failure — an inability to analyse what customers wanted and were doing, and to modify company strategy to take advantage of that. We think that the sales and marketing budget was skewed in favour of marketing, which makes this failure even odder.
There were multiple acquisition offers for the company in the 2017 to 2020 period but they were rejected, enabling Captain Hindsight and fellow armchair quarterbacks to be now having a great time. These offers were substantially more than HPE’s $374 million, meaning we think way above $500 million and approaching or in the $750 million area. Perhaps even higher.
This brings us to the board. Why did the board let Zerto leadership mis-manage the company and miss the multiple opportunities to sell Zerto and crystallize their investments? Perhaps they were bewitched by the engineering credentials of the Kedems and their track record. They should not have been. Ziv should have been shunted sideways to a CTO-type role and a professional CEO brought in.
Staff were offered stock options in the glory years, with stock priced using glory years expectations. Now they appear to be underwater, with staff who have not yet vested their options unlikely to do so as it would be a worthless exercise.
HPE is adding Zerto’s software to its GreenLake subscription business. Merely embracing the subscription model wholeheartedly, as it has, should enable HPE to return Zerto to growth. Lowering the cost to make Zerto DR practicable for non-mission-critical apps could strongly expand the Zerto footprint in existing customers.
HPE will do what the Zerto leadership should have done with the product years ago. But the ultimate responsibility for Zerto’s failure to achieve its potential lies with the board. Its lack of action is bewildering and it should have done better.