Nutanix May Become First Hyperconverged Infrastructure Startup to Go Public

Nutanix, the hottest hyperconverged infrastructure startup, this week filed for an IPO, hoping to go public early next year.

The company sells IT systems that consist of simple commodity x86 hardware and sophisticated software that simplifies infrastructure deployment and management for enterprises. Instead of separate compute, storage, and networking silos, hyperconverged infrastructure offers a single SKU with a single management layer for all of the above, including advanced software-defined storage capabilities, which is a key factor that differentiates it from converged infrastructure.

Interest in this architecture, which didn’t exist until about two years ago, is on the rise, and Nutanix is leading the charge. It has secured a list of recognizable customer names, such as Activision Blizzard, Best Buy, Kellogg, Nasdaq, Nintendo, Nordstrom, Toyota, and the Department of Defense, and partnered with some of the world’s largest IT vendors, such as Dell and Lenovo.

Its IPO will be closely watched, given the less-than-stellar year for enterprise tech IPOs that 2015 has been, such as Box’s debut in January or the Pure Storage float in October, and the simultaneous excitement and uncertainty about hyperconverged infrastructure.

While it appears promising today, it’s hard to predict whether hyperconvergence is going to stick as a popular architecture or be outdone by another technology, and Nutanix acknowledges that risk, among many other risk factors, in its SEC filing.

Another major source of risk is competition. Nutanix is up against nearly every major IT vendor – the likes of HP, Cisco, IBM, EMC, Oracle, or Dell, many of whom not only sell pre-integrated full IT stacks but also have hyperconverged and converged infrastructure products of their own.

Particularly worrying for the startup is its OEM partnership with Dell, which is in the process of acquiring EMC. If the deal closes, three of Nutanix’s major competitors, Dell, EMC, and EMC-controlled VMware, will become one company that may just spend more time promoting its own storage solutions, and converged infrastructure systems than Nutanix’s.

As is often the case with even the most successful startups, Nutanix has never made money. While the company managed to take its annual revenue from $31 million in 2013 to $240 million in its most recent full fiscal year (ended in July), its net losses have grown at a similar pace – from $45 million in 2013 to $126 million in the most recent fiscal year. Whether Nutanix can reverse the loss trend while maintaining revenue growth is a big outstanding question.

Simplifying infrastructure management and improving scalability are only parts of the story. Nutanix’s focus today is on enabling hybrid cloud, giving customers a seamless extension from their own data centers to public clouds and enabling them to easily move applications between the two environments.

Hybrid is a recent focus for Nutanix but an important one. As much as Amazon Web Services would like enterprises to move all their workloads to its cloud, most of them will not be ready to do that for the foreseeable future. They do like to use public cloud for some things, however, and hybrid is a compromise that works.

Beyond that, what Nutanix is selling to enterprises is the data center scalability and flexibility internet giants like Google, Facebook, and Microsoft built in their web-scale data centers. The startup is packaging web-scale IT architecture for enterprise consumption.

This is the kind of infrastructure that supports and enables what Gartner calls “Mode 2.” The expression is used to describe the highly experimental approach to rolling out software products and features quickly and frequently that the internet giants have perfected. Enterprises are increasingly keen to use this approach, as digital products are expected to drive more and more revenue for even the most traditional industries.

Generally, about 18 percent of a company’s revenue today comes from digital business capabilities, Gartner analyst Raymond Paquet said in a presentation at the market research giant’s data center management conference in Las Vegas earlier this month. It will be 25 percent in two years, and 41 percent in 2020, he said.

While today converged and hyperconverged infrastructure are used primarily to deploy static “Mode 1” applications, these architectures will become increasingly popular as a way to enable dynamic Mode 2 applications, according to George Weiss, another Gartner analyst.

“Forget Mode 1 as the primary purpose of hyperconverged,” he said. “Think Mode 2 more and more as a possible alternative [for] this infrastructure.”

And that’s what it is today – a “possible alternative.” There are other options available to companies wanting that flexibility. Whether hyperconvergence will emerge as one of the top ones is a big unknown and a question of life or death for a company like Nutanix