NeoScale Secures Funding, CEO

NeoScale Systems has gotten a money-fueled makeover: The storage security startup announced today that it has closed a $12 million second round of funding and hired a new president and CEO (see NeoScale Reels In $12M, CEO).

The round, which brings NeoScale's total funding to $25.5 million, was led by newcomer Sevin Rosen Funds. Also participating were previous investors Bay Partners and Lightspeed Venture Partners. NeoScale, founded in June 2000, is based in Milpitas, Calif. [Disclosure: Lightspeed Venture Partners is an investor in Light Reading Inc., which publishes Byte and Switch.]

In addition to its funding, NeoScale said that cofounder Aseem Vaid has vacated his CEO spot and moved to the position of chief technology officer. Taking over the management of the company is former Nishan Systems Inc. CEO John McGraw, who has been appointed president, CEO, and chairman. McGraw will remain on Nishan's board of directors.

Strategic Research Corp. analyst Michael Peterson says NeoScale's management changes make sense. "NeoScale is rounding out its management team with someone who has more experience," he says. "This is what most early-stage technology companies do. The founders move over."

While founders often bring cutting-edge technology to the table, they don't always have the business know-how or reputation to gain funding and keep the business afloat, Peterson says. "Funding is all about people. That's what you need for validation and credibility in the market now."Actually, McGraw has been at NeoScale for the past month and a half helping negotiate the funding round. He says much of the new capital will go toward hiring more people to the company's current 40-person staff. Half of the new hires will be in sales and marketing, he says, while additional engineering staff will be brought on board in response to customer and partner needs.

"The money will last us until we're cash-flow positive," he says, a goal NeoScale expects to reach before the end of 2004. "Essentially, it will last forever." [Ed. note: Uh... forever? As Prince once said, "Forever is a mighty long time..."] Although NeoScale's latest funding stash didn't come in the form of an up round, McGraw insists the valuation was good.

The fact that NeoScale is already shipping two separate CryptoStor security appliances and claims to have about a dozen paying customers so far, probably also helped boost its valuation (see NeoScale Unlocks Security Appliance and NeoScale Ships SAN Security). The appliances sit on Fibre Channel SANs, using NeoScale's proprietary software and hardware to provide wire-speed, policy-based data encryption and authentication. Others in the SAN security space include Decru Inc., Ingrian Networks Inc., Kasten Chase Applied Research Ltd., and Vormetric Inc.

"Unless you're shipping and have revenue, the valuation is lousy," Peterson says.

Before joining Nishan, McGraw was president and CEO of optical component maker LightLogic Corp., which was acquired by Intel Corp. (Nasdaq: INTC). He has also worked as VP and general manager of the Electronics Group of Raychem Corp., now part of Tyco International Ltd. (NYSE: TYC; London: TYI). He has a master's degree in mechanical engineering from Cornell University and an MBA from the MIT Sloan School of Business. [Ed. note: Of course, McGraw also won 2,763 games in a 33-year major league managing career, mostly with the New York Giants.]Eugénie Larson, Reporter, Byte and Switch