VCs: Who's Hot?

It's often said that the quality of a startup's technology and management can be judged by the quality of its financial backers. However, the reverse can also be true; it's possible to identify the VCs that have got their acts together on storage networking technology by looking at which hot -- or not so hot -- startups they're backing.

With this in mind, Byte and Switch has established a ranking of VCs in terms of how many of the leading storage networking startups are in their portfolios.

As it happens, the VCs backing the largest number of storage networking startups also appear to have picked the most promising investments. All of the startups in Byte and Switch's Top Ten Private Storage Networking Companies are represented in the ranking.

Of course, this listing is going to change over time as new startups emerge and older ones stumble. All the same, the exercise helps focus attention on the fact that money plays a key role in fueling developments in this industry, and smart money and smart startups often go together.

Table 1: VCs Backing the Most Storage Networking Startups

Right now, the top spot on our VC scoreboard goes to Battery Ventures which has five active investments in storage-relatedcompanies, having led (or co-led) the Series A financings for Akara, Kashya, Storigen Systems, Storability, and Sangate Systems.

These investments are a bet on the convergence of NAS and SAN technologies into a single appliance and storage becoming a managed service deliverable over wide-area networks.

Second place on the list is shared by New Enterprise Associates (NEA) from Menlo Park, Calif., and OneLiberty Ventures, based in Cambridge, Mass. Both have invested in no fewer than four storage startups.

OneLiberty clearly has a penchant for high-end datacenter technology, most notably Infiniband systems. Its the lead investor in Infiniswitch, a company building Infiniband-based switches, and VIEO, a startup writing software to manage Infiniband applications. Duncan McCallum, a partner with OneLiberty, also advised it to invest in Storigen (see Storigen: Echoes of Akamai) and DataCore Software (see Virtualization Vendors Vie for OEMs).

NEA has a taken a different tack, with investments in companies targeting the enterprise storage market. 3Ware, for example, provides a switch and storage system in-one that fits snugly under a desk, while DataCore’s software runs on Windows NT servers, commonly used by small and medium-size businesses. Additional investments include Troika (see Top Ten Private Storage Networking Companies) and Confluence Networks.Of the next three VCs on the list, two of them, Lightspeed Venture Partners and Worldview Technology Partners, have investments in storage service providers (SSPs) -- Lightspeed in Storability and Worldview in StorageWay. These are considered to be relatively risky investments, considering the lack of success of similar business models (see StorageWay Snags $42M). [Disclosure: Lightspeed is an investor in Light Reading Inc., the publisher of Byte and Switch.]

However, both these investment firms have balanced their portfolios with startups that rank highly on the Byte and Switch Top 10 list, perhaps to offset this risk.

One particular member of our Top 10 list, BlueArc, stands out as a well-funded company -- with $100 million to date from several different investors. However, the majority of these do not appear on the movers and shakers list above. For all of them except JP Morgan and Dell Ventures, BlueArc is their only investment in this sector.

There are pros and cons associated with retaining multiple VCs, as opposed to going for just a few.

Chris Baldwin, a partner at Charles River Ventures, says the cons outweigh the pros, in general. “A VC's most precious asset is their time and the people that they know. If there are many VCs in a deal it means that each has a smaller piece of the pie and they can’t devote the time or resources to the deal compared to when there are just two involved.” The challenge of leading the syndicate as it grows, he says, is also hard for both the company CEO and the lead investors.The big pro is more "money around the table" for later financings.

The VCs’ favorites include Nishan, Cereva, StorageWay, and Confluence Networks, as each of these companies has three or more of the movers and shakers on the list investing in them. Time will tell whether these favorites turn out to be winners.

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com