VCs Add $15M More to Data Domain

Data Domain Inc. today closed a $15 million funding round that its CEO says will take the disk-backup startup to profitability in a year (see Data Domain Closes $15M Round).

CEO Frank Slootman says Data Domain doubled its revenue sequentially last quarter after rolling out an enterprise version of its backup appliance (see Diskers Enjoying Tape Woes and Data Domain Targets Enterprise Backup ). The startup will have to continue to double its run rate to reach Slootmans goal of turning a profit midway through 2006, which is why he will use most of the new funding to beef up sales staff. Slootman says he expects to add about 15 to 20 sales and support staffers to the 70-person Palo Alto, Calif.-based company.

Slootman says Data domain has around 110 customers since it started shipping in February 2004. About 30 of those customers have been added since it launched its larger appliance earlier this year. “This will help us turn the corner," Slootman says. “We’re going to start making cash instead of burning it.”

That won't be easy, considering Data Domain's competition is swelling with established storage players as well as startups. When it first started shipping, Data Domain was among an early group of startups promising a better way of doing backups than tape provided (see Disk Backup's a Red-Hot Idea). After several costly security lapses involving tape, and the arrival of cheaper SATA drives and new disk-backup technologies such as virtual tape libraries (VTLs), content addressed storage (CAS), and continuous data protection (CDP), Data Domain’s battle is to convince customers it offers a better alternative to other disk vendors (see A Tale of Lost Tapes).

“I’ve been here a little over two years, and when I started it was disk versus tape,” Slootman says. “Now it’s disk versus disk. We don’t have to tell customers tape sucks, they come to us and say, ‘We’re well aware of that.’ ”Slootman might end up wishing he were still battling tape vendors. Now that it’s “disk versus disk,” Data Domain is mostly banging heads with EMC Corp.'s (NYSE: EMC) Clarion Disk Library (CDL) and Network Appliance Inc.'s (Nasdaq: NTAP) NearStore disk backup systems in deals (see EMC and HP Spin Disk, NetApp Promotes SATA, and NetApp Ships NearStore).

Even tape vendors Overland Storage Inc. (Nasdaq: OVRL), Quantum Corp. (NYSE: DSS), and Storage Technology Corp. (StorageTek) (NYSE: STK) are in the disk-backup game, as well as startups such as Archivas Inc., Diligent Technologies Corp., Intradyn Inc., Nexsan Technologies Inc., Permabit Inc., Sepaton Inc., and Unitrends Corp. that take a variety of approaches.

Data Domain’s differentiator is its compression algorithm. It uses a technique it calls "capacity optimized storage" to compress data. When backup software writes data to a Data Domain device, the device detects data that has already been saved, and inserts a pointer to the original block instead of saving it again. Data Domain claims this makes backup more efficient and saves money because it requires less disk space.

Data Domain counts on price as a competitive edge over the big guys like EMC and NetApp, but Slootman is angling to becoming a partner rather than competitor to one of them. Data Domain already partners with EMC for its Legato backup software, and Slootman would like the partnership to include CDL.

“We run into CDL a lot in deals because EMC has stepped up marketing, but we’ll figure out a way to partner with them,” he says. “They use fast cache, we use efficient data retention -- you need both.”Data Domain has raised $41 million over three funding rounds. Previous investors Greylock Partners, New Enterprise Associates (NEA), and Sutter Hill Ventures participated in the latest round, with Greylock the lead investor.

— Dave Raffo, Senior Editor, Byte and Switch