Sometimes discovering what’s really important to the market requires swallowing your pride

Sometimes the sky is too high, even for the loftiest venture. Consider the case of Spinnaker Networks. Back in the heady days of 1999, when Venture Capital flowed freely and forecasts for growth and profits in information technology seemed exempt from the laws of gravity, the brash Pittsburgh-based startup launched its next-generation data storage business. 

Spinnaker had it all, or so it seemed. Top experts from three related disciplines – networking, distributed file systems, and custom hardware – had left their posts at FORE, Transarc, and IBM and come together to create the ultimate network storage solution for a Web-savvy 21st century. They were on track to reinvent the entire approach to data storage technology – materials, hardware, software, everything. And their claim of being able to improve current performance tenfold caught the imagination of Venture backers, who rewarded them with $20 million in Series A financing after just a few days of pitching. The wind was clearly in their sails. Then reality set in.

Getting the Right Product to Market

“We were really pushing the envelope,” Hornung recalled. “We were taking on a very complex, leading-edge system with very complex hardware and software. As a result, our schedules were moving out. We originally had a go-to-market date of September of 2001. And, before you knew it, we were into September 2002. 
“At the same time, the performance of what we were bringing to market was coming down. So not only was the schedule going in the wrong direction, the features and functionality were going in the wrong direction. And to make it complete, the third leg of the stool wasn’t doing well, either: our cost to manufacture the product was going in the wrong direction.” 

That wasn’t all. Back during the giddy days of the late ‘90s, the true cost of goods sold never enjoyed much focus among investors. “I was never able to find a cost target for the Series A pitch,” Hornung admitted, but that index too, was moving in the wrong direction. 

Real pain

The enthusiasm of a company’s investors, advisers, and employees can be intoxicating. But sometimes, it can also mislead. What, at the end of the day, is really real? No one seemed to know. But to find out, the company decided it had to speak with prospective customers and get authentic feedback on its value proposition, performance claims, and price points of its product. 
“What we found was very that there was real pain in the IT organization. But the real ‘ah ha!’ was that what we were building didn’t align exactly with the problem. We were close, but we were off,” Hornung acknowledged. Customers simply didn’t know what to do with a tenfold performance advantage – even if the price were the same. Maybe a 50 percent gain, or even double the performance might register. But ten times? Fuggedaboudet. And price really does matter. A product costing a quarter million dollars – particularly from a relatively unknown startup – just won’t make it. Customers expect an entry price under $100,000. Even the appropriate unit of measure was off. Instead of dollars per operation – where Spinnaker’s product excelled – the metric that really mattered to practitioners was dollars per megabyte of storage.

Hardware store

There were also two other problems. For one, Spinnaker’s original system had been based on custom hardware, which the company saw performing well beyond what standard, off-the-shelf Intel chips could deliver. But, as it turned out, Intel’s speed climbed much faster than expected. The other, even more troubling issue, was that the potential market for systems large enough to justify purchase of a Spinnaker product was just too small to justify the net return on engineering expense. 
“So with our internal stuff going in the wrong direction, and customers telling us something different, and our competitor technologies actually gaining ground faster, how do we change our positioning?” he asked. “We decided we had the core of the right product in the marketplace in the distributed file system. But we were building it on the wrong hardware. Instead of this custom hardware approach, we needed to use standard hardware and still get the benefits of our software. That was the big “ah ha!” 

“We’d have half again the performance of Network Appliance’s top-of-the-line at under $100,000. We would ride the Intel curve. And as it turned out, that was a very interesting positioning message. It resonated quite well with the investment community.” 

By 2002, it also rang a bell with the customer community. “Cost conservation was king,” he recalled. “If you could actually solve the same problem at half the cost, all of a sudden, you’ve got their attention. What was unique about Spinnaker, and what they really were buying into, was our distributed file system software – our Secret Sauce. That’s where the real value was. But you wouldn’t get a chance to have people even consider it if you were too high-priced and at performance levels they couldn’t use. 

Agnostics

In response, the company made a painful decision. While the potential performance of its original configuration of proprietary materials, hardware, and software could have blown the competition away, customers were reluctant to invest so heavily in a startup company’s new technology. So Spinnaker decided to drop its proprietary hardware. “We said ‘we’re not going to force you to buy a system from us; what you want to get from Spinnaker is this distributed file system software technology. We’ll bring that to market for you. We’ll be agnostic with regard to where your disk drives come from. If you want to buy it from us single-system, absolutely; we’ll package it up and sell it to you as one complete system. But, if you just want to buy our Secret Sauce and use Hitachi drives or ATA drives, that’s fine too’.” 

Soon, the company’s message was honed to a simple claim: 50% better, 50% cheaper. “That really got people interested. To be able to have that crisp a message really was a good door opener,” Hornung said. Of course, the 50% comparisons were not against just anyone; they were directly targeted toward the two largest companies in the field, EMC and Network Appliance. And it worked. Not only did Spinnaker attract some of the nation’s most prestigious clients, by the fourth quarter of 2003, it also attracted an offer it couldn’t refuse: a $320 million buyout from Network Appliance itself. 

Today, Spinnaker’s Secret Sauce – its distributed file system software – is beginning to trickle down the NetApp product line. In time, Hornung expects it to permeate the company’s full family of network products. In the meantime, Spinnaker’s saga of transformation drove home lessons that have stuck with its followers. “First, we didn’t get it right the first time, and we’re never going to be right the first time,” he noted. “Second, understand the facts, adapt, and change your positioning, product plans, and your messaging as you go. And finally, if your message can be crisp and tangible, you’re ahead of the game.”

ABOUT THE AUTHOR:
Peter Longini is a contributing writer for the Pittsburgh Product Strategy Network. Peter is a former professor of communication research at the University of Pittsburgh and professor of TV-Radio at Brooklyn College, CUNY. During the 1980s, he was an executive speechwriter at PPG Industries in Pittsburgh. Since 1992, he has been the principal of Peter Longini Communications, an editorial services company in Wexford, PA whose clients include various publications, public sector agencies, nonprofit organizations and corporations. In January 2003, Dr. Longini became an adjunct faculty member of New York University and Director of Communications for Cranberry Township, Pennsylvania. He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it