The R&D Tax Aspects of Data Storage Startups



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Data-Storage         The digital universe is constantly expanding. Actually, it is doubling in size every two years. It is projected that by 2020, it will contain nearly as many bits as there are stars in the universe. A recent EMC sponsored study predicts that data created and copied will grow by a factor of ten between 2013 and 2020, from 4.4 trillion gigabytes to 44 trillion.  

        In our increasingly data-intensive world, it is no wonder the data storage industry has gained so much attention. According to research firm International Data Corporation (IDC), companies will spend over $40 billion on storage hardware in 2015 alone.     

        The dynamic data storage market has been marked by a fierce competition between technology giants and well-funded start-ups that rely on innovation as the basis of competitiveness. The present article will explore the most recent trends in data storage and discuss how innovative start-ups are gaining ground in this highly competitive segment.


The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On December 18, 2015 President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and start-up businesses can utilize the credit against payroll taxes.


Flash Memory and the Technological Evolution of Data Storage

        Invented in the 1980’s, flash memory technology has become ubiquitous over the last decade, due to the increasing use of smartphones, tablets, and other mobile devices. Compact and flexible, flash memory is a nonvolatile computer storage medium that can be electronically erased and reprogrammed.  

        Different from hard disk drives (HDD) that use rigid, rotating disks coated with magnetic material, flash memory is a solid state storage device, meaning there are no moving elements and it is an electronic memory instead of mechanical.
 
        Due to its unique configuration, flash memory technology represents significant advances in comparison to hard drives both in terms of energy consumption and vulnerability to mechanical errors. It is also lighter, smaller in size, and it allows for faster access. This reduced access time enables users to retrieve data up to 20 times faster than hard drives. It also allows them to start transferring data in less than a thousandth of second.  

        Because of its easy and fast information storage, flash memory is seen as a productivity enhancing tool that enables considerable acceleration of online operations.


All-Flash Pioneers

        Research foresees an unprecedented generation of data over the next years. This data boom goes hand-in-hand with the need for storage capacity, which represents an increasing share of companies’ IT investments. According to CB Insights, the data-storage market has attracted more than $6 billion in venture capital funding distributed among 96 startups between 2010 and the first half of 2015.  

        These promising companies are offering innovative storage-related hardware, software, and services that help organizations store data without compromising the speed of their operations. The following paragraphs discuss how data-storage startups are creating all-flash solutions that help companies navigate the world of big data.


I. Tintri, Inc: The mismatch between our dynamic, virtualized environment and traditional storage products has become increasingly evident. Aiming to bridge this gap, Mountain View, CA based Tintri offers highly adaptable, smart storage solutions that enable IT workers to focus on virtualized applications instead of managing storage infrastructure.

        The company has developed user-friendly, application-aware storage products capable of seeing how applications behave at the virtualization layer and presenting information in a way that is useful to IT professionals.
The “innovation obsessed” Tintri holds nineteen patents and the company recently introduced the VMstore T5000, its first all-flash series. The innovative solution is entirely VM-aware, which means that users do not have to worry about logical unit numbers or volumes, they only have to think in terms of what matters to the organization: virtual machines.

        Tintri VMstore T5000 All-Flash series can pack 5,000 VMs into just two rack units, putting an end to over-provisioning. The company’s ambitious 2016 roadmap aims to scale up its storage to support a total of one million VMs with automation, self-service, and analytics.  

        As of August 2015, Tintri had raised a total of $260 million in funding. It is said to consider a possible IPO in the first semester of 2016.


II. Pure Storage, Inc: Named a leader two years in a row in the Gartner Magic Quadrant for Solid-State Arrays, Pure Storage Inc. aims to transform IT by offering innovative storage that allow for faster applications, real-time analytics, and a completely virtualized environment.

        With over three hundred patents and patent applications, the Mountain View, CA based company is a pioneer in all-flash solutions.  Pure Storage’s Evergreen Storage concept is an attempt to transform the typical storage ownership cycle which requires frequent and expensive upgrades that require major change sto the existing infrastructure.

        Aiming to break this costly cycle, Pure Storage created a modular, stateless, scalable, field serviceable, and field upgradable flash array that evolves with the user, adding value for over a decade. Users of the innovative Evergreen solution deploy storage once and then upgrade it in place for enhanced capacity, density, performance or other features, eliminating downtime, performance impacts, and data migration.

        Pure’s Evergreen Business Model ensures that customers who buy into the FlashArray platform are routinely modernized with the latest technology for no additional charge.

        In April 2015, Pure Storage raised $225 million, its largest round to date, totaling $470 million in funding. The company, which was valued at over $3 billion, is among the fastest growing hardware systems businesses in technology industry history. Its average of more than fifty percent sequential quarterly growth puts it at about twice the pace of other storage leaders.


III. Kaminario: Headquartered in Boston, Kaminario focuses on delivering consistent and predictable performance in a cost-efficient way. The company’s innovative K2 all-flash array costs an average of under $1/GB, which is significantly lower than legacy and hybrid storage. It is designed to allow both scaling-up to add capacity or scaling-out to increase both capacity and performance. These features have made Kaminario a leader in midrange enterprise-class all-flash storage.

        With the K2 v5.5 systems, Kaminario has become the first vendor to offer all-flash primary storage arrays that use solid-state drives (SSDs) based on 3D TLC (triple-level cell) NAND chip technology. The combination of the  cost-efficient capacity of 3D TLC SSDs and innovative replication capabilities make Kaminario’s K2 a major breakthrough that promises to make all-flash data centers a reality.

        According to CEO Dani Golan, the advent of SSDs based on 3D TLC narrows the price differential between SSDs and hard disk drives to the point where the other benefits of SSDs - including smaller size; reduced heat generation; and lower complexity in terms of moving data between different types of storage medium - trump cost per gigabyte issue.  

        K2 v5.5 systems can also provide up to 1.92 TB of 3D TLC storage. With features like inline compression and deduplication, load-balanced writes, RAID optimizations and a flash-friendly data layout technology, it presents enhanced endurance, up to ten times that of previous flash arrays.  

        Other examples of thriving storage startups include Santa Clara, CA based Violin Memory, Inc., whose all-flash storage platform recently attracted five new Fortune Global 500 and four Fortune 1000 customers,  and Boulder, CO based SolidFire Inc., which recently raised $82 million, totaling to $150 million in funding.


A Hyperconverged Market

        In traditional IT environments, there are separate systems for storage, servers, and network. This entails handling the purchase, provision, and support of each system infrastructure as well as maintaining relationships with different vendors.

        Innovative companies, however, are challenging this paradigm, offering all-in-one, hyperconverged solutions. As defined by the International Data Corporation (IDC), “Hyperconverged systems are an emerging technology that natively collapse core storage, compute, and storage networking functions into a single software solution or appliance.”  

        With a simplified architecture, hyperconverged systems allow users to scale-out – meaning that they can enhance performance and capacity by adding more modules, instead of being forced to scale up by adding more drives, memory, or CPUs. These innovative systems also enable a significant reduction in administrative overhead and a simplification of vendor management.   

        IDC estimates that the hyperconverged systems market grew 162.3 percent in 2014 to a market value of $373 million. Nearly two-dozen companies entered or expressed intention to enter said market in 2014, a year that was also marked by product announcements and venture capital funding. Projections for 2015 are very optimistic, with $807 million in global revenue and 116.2 percent growth over 2014.  

        Founded in 2009, virtualized storage company Nutanix Inc. is a leader in the hyperconverged market. With more than 800 employees, the San Jose, CA startup has raised more than $317 million in funding from top-tier investors. The company is said to have its eyes set on an IPO with a potential valuation of over $2 billion.

        Nutanix defends that the most transformative technologies are the ones we don’t even think about. They simply work – they are invisible. Thus, its objective is to make data center infrastructure invisible, elevating each aspect of the IT lifecycle to focus on the applications and services that power the user’s business.

        Nutanix’s software-driven Xtreme Computing Platform natively converges compute, virtualization, and storage into a turnkey appliance that is deployed in just 30 to 60 minutes, and runs any application at any scale. It uses web-scale technologies and architectures that originated in large Internet and cloud companies, such as Google, Facebook and Amazon.

        With extensive automation and rich system-wide monitoring for data-driven efficiency, the Xtreme Platform is designed to tolerate component failures through fault isolation and automatic recovery without bringing down the overall system.

        The concept of “invisibility” is translated into greater agility, predictable performance and scalability as well as reductions in both virtualization costs (up to 80 percent) and total cost of ownership (up to 60 percent).

        Also founded in 2009, SimpliVity is another prominent player in the hyperconverged market. In March 2015, the company raised $175 million in series D funding at a valuation of more than $1 billion, becoming the first IT infrastructure company to reach such a valuation just 23 months after launching its flagship product.  

        Headquartered in Westborough, MA, SimpliVity is the creator of Omnicube, a single IT infrastructure platform that provides enterprise computing, storage services, and network functionality. The solution features 10 patent-pending innovations and enables WAN optimization, unified global management, seamless cloud integration, primary storage deduplication, backup deduplication, caching, and global scale out. In addition to being a fraction of the cost of traditional infrastructures, SimpliVity offers a major reduction in IT complexity.

        In August 2015, the company launched the third version of its virtualization platform. With a focus on Remote Offices and Branch Offices (ROBO), it offers automatic, multi-site network discovery, including a support for hub and spoke configurations. SimpliVity’s innovative Unified Protected ROBO solution is designed to address the complex management and data protection requirements of enterprises with remote office/branch offices.  

        SimpliVity claims a 250 percent year-over-year sales growth for 2015's second quarter and has won 700 partners in 61 nations and shipped 2,500 systems since 2014. According to the company’s website, “SimpliVity’s innovation is not additive and complementary to in-place data center technology; it is revolutionary and disruptive.”


The Importance of Software

        In the world of data storage, software plays a crucial role in maximizing efficiency. A growing number of software-only data storage startups focus on eliminating and automating tasks that traditionally demand labor, including managing backups and optimizing performance through distribution among different devices.

        This is the case for San Francisco based Scality, a pioneer in software-defined storage on a petabyte-scale. Founded in 2009, the French-American company recently completed a $45 million series D funding round. Since July 2013, it experienced a 400 percent growth in revenue and its staff went from 42 to 162. Global resale agreements signed with Dell, HP, and major customers including Dailymontion, Comcast, Deluxe OnDemand, UK cloud provider Phoenix, and German television channel RTL II have opened the way for such a remarkable growth.

        Scality’s RING platform for data storage can be overlaid on standard servers. In practical terms, it enables users to keep their hardware and use it to build an open-architecture, highly efficient storage system. The innovative software makes standard x86 servers scale to hundreds of petabytes and billions of objects. It integrates with applications through standard storage protocols such as NFS; S3; OpenStack Swift, and Cinder.

        The RING has a patented object storage core that manages data as objects - as opposed to other storage architectures such as file systems, which use file hierarchy, or block storage, within sectors and tracks. This unique architecture increases availability and durability while reducing operational costs.

        In March 2015, Scality launched the RING 5.0, which offers a simplified 15 minute installation, UI-driven provisioning, Windows connectivity, and performance boosts.

        A 2014 IDC report placed Scality as the leader in the object-based storage market, giving it the highest scores in capabilities and strategy. CEO Jerome Lecat expects that the company’s innovative solution will represent $5 billion of the data storage industry over the next five years. 

        San Jose, CA based PernixData Inc. is another example of a software-only data storage startup. The company’s FVP software moves storage, reads, and writes in to the server tier using clustered flash/RAM to ensure fast performance with seamless operations, scale-out growth, and complete fault tolerance. By decoupling strategic software functions from underlying hardware it enables users to optimize storage for virtualized applications.

        With robust real-time analytics, PernixData’s Architect software enables enhanced visibility and control of virtual machines and storage. A tool for holistic data center design and management, the Architect uses operational logs and the company’s database to produce custom suggestions on how to optimize capacity to accommodate new applications. In addition to providing a more accurate alternative to manual estimation, this automation of storage planning frees up administrators to focus on more pressing matters.  


A New Frontier

        In July 2015, Intel and Micron unveiled the 3D Xpoint, a new storage chip that claims to be 1,000 times faster than the NAND architecture underlying most flash memory cards and solid state drives.

        This new class of non-volatile memory is allegedly denser, tougher, and faster than the competition. It is also smaller in size, since its cells feature diodes instead of space-consuming transistors.  

        A recent report by Objective Analysis predicts that 3D Xpoint production shipments could start in 2017, with a potential $2.12 billion market by 2019. The study concludes that this groundbreaking technology will not replace NAND but it will rather insert a new layer in the memory-storage hierarchy.  


Conclusion

        The unprecedented expansion of the digital world has put data storage in the spotlight. As legacy models prove unable meet the needs of virtualized applications, new solutions emerge, including all-flash arrays, hyperconverged systems, and uniquely designed software for storage optimization. The multiplication of data storage startups and their ability to compete with well-established technology giants leave no doubt as to the power of innovation.  Federal and state R&D Tax Credits are available to help stimulate and support companies who are developing innovative data storage technologies.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.


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