Virtual Instruments, A Startup Led By Microsoft Chairman John Thompson, Lays Off More Than Half Its Staff

Virtual Instruments, a 7-year-old infrastructure performance management startup led by Microsoft Chairman John Thompson, has laid off nearly two-thirds of its staff in the past month as part of a shift to the cloud subscription model, sources close to the company told CRN on Monday.

Virtual Instruments sells an integrated software/hardware appliance that gives organizations real-time visibility into the operations and performance of their virtualized environments, ensuring mission-critical applications get the resources they need for consistent performance.

The San Jose, Calif.-based startup laid off close to one-third of its staff of around 300 employees in mid-October, and then let go about the same number in a subsequent round of cuts last week, said the sources, who didn't want to be named.

[Related: VMware Sets Sights On Startup VMTurbo As Cloud Management Battle Heats Up]

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The layoffs primarily impacted employees in sales and engineering, and some of those affected were furloughed, according to the sources.

John Gentry, vice president of marketing and alliances at Virtual Instruments, confirmed the layoffs in an interview Monday, noting that the majority affected "noncritical functions" such as general administration and lower-performing salespeople.

"We were slightly less than 300 [employees] going into this, and are now more than slightly over 100 coming out of it," Gentry told CRN.

"We were put in a position where we were anticipating ongoing funding that did not occur, and we had to make hard decisions. Our primary goal is continuing to serve our customers and partners," Gentry said.

Virtual Instruments has received just over $76 million in funding in six rounds since its founding in June 2008, according to Crunchbase. Its last funding round, a $27.5 million Series D in September 2012, was led by General Catalyst Partners, Cambridge, Mass.

Despite the job cuts, Virtual Instruments has maintained a "fully functional organization" with services, support and engineering capabilities intact, said Gentry.

"In many ways, this was about ensuring that we would not be beholden to the broader investment or acquisition market, and would be able to live up to the commitments we've made. It's about taking much more active control over our destiny," Gentry said.

Meanwhile, seven of eight members of Virtual Instruments' board of directors have resigned, including representatives from investors General Catalyst Partners, Lightspeed Venture Partners, Riverwood Capital and Next World Capital, according to the sources.

Thompson, who became chairman of Microsoft's board of directors in February 2014, is the sole remaining member of the Virtual Instruments board, said the sources.

Gentry declined to comment on the board resignations, but said ownership structure of Virtual Instruments, from a shareholder perspective, has not changed.

"General Catalyst Partners and Lightspeed Ventures are still shareholders. Their involvement has shifted from board responsibility to an advisory responsibility," Gentry said.

Virtual Instruments recently sought to find a buyer for the company but was unsuccessful, said the sources. Last week, the startup reached an agreement with TriplePoint Capital, a Menlo Park, Calif.-based venture capital firm, for additional funding, the sources said.

Gentry confirmed that TriplePoint Capital has provided additional capital but said the firm hasn't taken an ownership stake in Virtual Instruments. TriplePoint representatives weren't immediately available for comment.

Two sources told CRN that Virtual Instruments has run into cash flow problems and hasn't paid severance for employees that were let go in mid-October.

Gentry said Virtual Instruments is in the process of working out these issues. "All I can say is that in transitions like this, there are logistics associated with changes that can disrupt the normal flow of operations," he said. "As those logistics sort themselves out, employees will be made whole."

The sources said Virtual Instruments' technology is still primarily focused on fiber channel SAN, a market that industry analysts say is contracting. "It's now a server-first deployment with heavy capital expense," one source said in describing Virtual Instruments' technology.

Gentry said Virtual Instruments is "aggressively pursuing" the cloud software subscription model, although it's not planning to abandon its perpetual licensing model.

"We have been trying to expand beyond the fiber channel, SAN-attached world for some time," Gentry said.

Thompson was unavailable for comment, but Gentry said the former Symantec CEO and longtime IBM executive plans to continue in his role as CEO of Virtual Instruments.

"To this point, John is fully committed and will remain as CEO and day-to-day operator," said Gentry.