Arsenal Loads $23M

Arsenal Digital Solutions Worldwide Inc. has scored $23 millionin third-round funding, giving the company high confidence it can survive as a storage service provider (SSP), though others have bailed on the model.

Geoff Sinn, Arsenals CEO, sees the funding as validation of itsapproach, despite a slew of other SSPs that have fled the market or otherwise rejiggered theiroperations (see StorageAlliance Steps on Gas).

“We stuck to our business model, and at times we got beat up for it, but now people are saying, ‘Hey, that’s great foresight, guys,’ ” Sinn says.

With the new funding, Arsenal’s expansion will be cautious. Currently at aheadcount of 65, Arsenal plans to hire fewer than a dozen additional staffers inthe next few months. Sinn expects the company to be cash-flow positive aroundthe beginning of the second quarter of 2002 and profitable sometime later in theyear.

But Sinn says he won’t be changing Arsenal’s basic strategy, which is to be thesole provider of storage services to its two distribution partners, AT&T Corp. (NYSE: T) and Verio Inc.. “Oneof our biggest assets is that we’ve got two very strong and stable partners,” hesays.Investors in the internally led round include Southeast Interactive Technology Funds, which had previously invested in thecompany, as well as Task USA and Covestco-Seteura LLC. To date, Durham, N.C.-based Arsenalhas received $42 million in funding. Previous investors include J.P.Morgan Chase & Co., MCNC, and Tyco Capital (formerly CIT).

Oddly, the terrorist attacks in September may have helped jumpstart Arsenal’s sales. The disasters in New York and at the Pentagon caused an unexpected wave of interest in the company’s offsite data storage services, Sinn says.

“It’s a bittersweet way to get business, but after what happened on September 11,everybody is thinking about backup and DR [disaster recovery], and we’re betterpositioned than anyone to provide that."

Steve Duplessie, an analyst with The Enterprise Storage Group Inc., says Arsenal owes its success to a solid strategy. Unlike some of itscompetitors in the once overheated SSP space, Arsenal has been able to keep avery low cost structure -- “They didn’t spend money like drunken sailors oninfrastructure in advance,” he says. He also says Arsenal has focused on second-tier services, like backup,instead of trying to convince customers to outsource their primary data to astartup.

“The fact that, at this point in time, they were able to raise 23 million bucksand have over 400 customers -- we now consider them the proof that the [SSP]concept was and is sound and that execution matters,” says Duplessie.That's not to say Arsenal didn’t go through its own slash-and-burnphase. At the end of 2000, Arsenal employed 165 people. In early 2001, thecompany laid off 100 employees -- nearly two-thirds of its workforce -- in threerounds of job cuts.

Founded in August 1998 as Usendit.com, the company was originally designed to provide services for exchanging large files over the Internet. Perhaps wisely, Arsenalopted to become an SSP in June 2000. Sinn previously had startedand headed up the managed storage services business of Storage Technology Corp. (StorageTek) (NYSE: STK), which was eventually spun out as ManagedStorage International Inc.

If all goes according to plan for Sinn into 2002, the latest round of fundingwill have been just the ammo Arsenal needed.

— Todd Spangler, special to Byte and Switch
http://www.byteandswitch.com