NeoScale's Up for Grabs

It's well known by now that encryption appliance startup NeoScale Systems has ceased operations. But its demise may point to deeper problems than the accounts receivable shortfalls that reportedly sunk the firm. And instead of being sold to EMC, HP, or another big supplier, the remaining assets of NeoScale may be auctioned off by top creditor Hercules Technology Growth Capital.

At least one former NeoScale employee, who spoke on condition of anonymity, says NeoScale closed shop on November 26, following weeks of ongoing layoffs and frantic attempts to salvage the key elements of the business. In the end, the company was in such bad shape that some employees were still owed expenses, an HR person was working pro bono, and all product support had ceased. According to the employee, the reason the company's Website remains up is that no one can pay to have it taken down.

NeoScale execs, including CEO Barbara Nelson, continue to ignore or refuse to comment on the status of NeoScale. Contacted on October 29, when Byte and Switch first heard rumblings of trouble, then-SVP of marketing and business development James Yu stated: "The situation will be clearer quite soon, but we won't be able to comment before then." On December 7, VP of marketing Dore Rosemblum replied to questions on the company's demise: "We still have no comment."

NeoScale board member Barry Eggars, founding partner of Lightspeed Venture Partners, insists there is "misinformation" in published reports, but declines to clarify. He says the board is intact and that NeoScale isn't being run by its bankers. "Obviously, I can't comment on the sale of the company until it is public," he wrote in an email on December 7.

Who will buy? Despite reports of interest from EMC, HP, and others, only one firm, encryption software maker nCipher, has acknowledged looking seriously at NeoScale. "I can acknowledge there's been interest, but I don't know the status beyond that," said an nCipher spokesman.How did things get so bad so quickly? After all, NeoScale was still making announcements in mid-October. It was an EMC Select vendor, reportedly had roughly 300 customers, and boasted a horde of industry partners. What went wrong?

According to the ex-employee, NeoScale had good technology, but there were product problems lurking in many installations. Management refused to focus marketing efforts, so NeoScale's products often wound up being put where they didn't fit, with resulting failures and refunds.

There may also have been a lack of management accountability and a breakdown in communications among top execs. "It's sad, if not disgraceful," says Arun Taneja of the Taneja Group, referring to NeoScale's alleged disastrous free fall. "Typically, I find things reach that level because of stubbornness somewhere in the company, and people not listening to the message in the market."

Other industry sources can only speculate. "I think they had a slow sales year. It's hard to be a standalone company in that space," says Gordon Nyquist, CEO of Mercury Storage, a VAR based in Michigan. He says he still has "no formal word" on NeoScale's demise, but that he thinks "there's not a soul still there." He's directing support calls to NeoScale's online portal.

"It's too bad. I thought well of them. They had good technology and good IP. We made money from selling them," Nyquist says. When asked whether he'll now move NeoScale customers to NetApp's Decru, all he'll say is "No comment."Not surprisingly, Decru spokespeople place the blame squarely on NeoScale's approach to the market and stand ready to act as unabashed vultures. "NetApp is excited about the opportunity to expand our already significant market presence of DataFort and Lifetime Key Management appliances," crows Tim Russell, VP of the Storage and Security Business Unit at NetApp, in an email to Byte and Switch. "We welcome the opportunity to demonstrate to organizations that have existing encryption solutions how they can quickly migrate to a NetApp-based solution... NetApp's field team is focused on supporting our existing partners as well as new partners and would welcome former Neoscale partners."

EMC is also currently working with NeoScale customers who purchased products on EMC's Select roster on "alternative solutions and support," according to an EMC spokesman.

At least one other competitor, newcomer Ingrian Networks, thinks NeoScale wasn't savvy enough. "There's a pretty clear explanation. They relied on storage and tape encryption," says Derek Tumulak, Ingrian's VP of product management. Users instead require protection at the application level, he says, as well as key management for a range of encrypted devices, including tape drives supporting the LTO-4 format, which incorporates integral encryption.

Sadly, NeoScale was in fact working on the next version of its KeyVault encryption key management package when it folded. The company also was active in work to standardize the management of encryption keys by the IEEE. "NeoScale has had a significant role in shaping the [IEEE] P1619.3 standard," writes Matt Ball, chair of the IEEE P1619 Security in Storage Working Group, in an email today. But the spec is still in process, he notes, and the current draft was mostly written by Decru. He also can't vouch for any implementation NeoScale may have had.

It may be awhile before the final disposition of NeoScale's assets is revealed. But if the assets aren't purchased, the ex-employee says Hercules may auction them off.Stay tuned. We're not giving up until we get final word.

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