SQL on a VM. Backup to Network location or just backup to VM
You should still backup away from the VM, or at least copy the backups off, preferably to a redundant location (either another SAN, or tape, whatever).

VMs can come back from a lot of things, but if you suffer a catastrophic failure, you may not be able to access the VM storage easily. 


C: drive fills up
Windows dies a horrible death
A patch goes wrong at some level (VM, Windows, etc.)


Backing up to a VM-agnostic location gives you some breathing room. While the SAN may still be a single point of failure (remember the redundant location thing?), if you need to stand up a new VM in an emergency, you want the backups to be as easy to restore as possible.