VCs Shell Out for Storage

Venture capital investment in storage startups is on the rise, according to the Quarterly Venture Capital Report released this week by Ernst & Young and VentureOne.

The report shows investment in data-storage startups for the first two quarters of 2004 has amounted to $225.8 million, already exceeding the $223.75 million total for all of 2003.

Data storage investment accounted for nearly one third of the total of $691 million VCs spent on information technology equipment in the first half of 2004.

While a far cry from the $672.65 million invested in the sector during 2001, investment for 2004 is on a pace to surpass the 2002 total of $423.28 million.

No rose-tinted glasses were delivered with the report, but it's not hard to be tempted to optimism by the figures. Even if there's just a bit of growth in data storage investment through the end of this year, that wee bit will be the first year-over-year uptick in sector investment by VCs since 2000.The survey numbers show that between 1999 and 2000, VC spending jumped 180 percent -- what's now viewed as the infamous bubble. After that, spending dropped 12 percent in 2001, 37 percent in 2002, and 47 percent in 2003.

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According to the report, the trend in storage reflected the overall rise in VC funding in the U.S., which was up 20 percent in the first half of 2004 compared with the first half of 2003. Funding by VCs for all industries topped $5 billion in the second quarter of this year, an 11 percent increase over the second quarter of 2003, though a slight (3.3 percent) decrease from the previous quarter, says the report. IT led the charge with its biggest numbers in two years -- $3 billion invested for the quarter.

In all, 12 rounds of funding for data storage startups closed in the first half of this year, compared with 15 rounds for all of 2003. Among the venture deals closed this quarter were $20 million in funding for iSCSI SAN vendor EqualLogic Inc. and $13.7 million for NetCell Corp., which makes storage acceleration devices.

Those rosy spectacles could quickly fog up, however. Despite positive signs, times remain tough for storage networking startups, as evidenced by poor IPO prospects (see Engenio Gets Cold Feet). Still, it looks as if VCs are at least a bit more willing to bet on the sector than they were, even though it's not clear how many startups will ultimately succeed.Brett Mendel, Senior Analyst,

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