Sandial's on the Clock

An unsuccessful round of Dialing for Dollars has forced switch startup Sandial Systems Inc. to slash half its staff while it looks for a cash infusion.

Sandial laid off 35 employees at the end of June after a venture funding round fell through. Marketing EVP Mike Welts says about 25 of the 35 remaining employees are developers, with most of the rest in sales and support. Sandial executives are still looking for investors to keep them going or suitors interested in acquiring the company.

"Its been an uphill battle,” Welts says. “We’re in a cash-conserve mode, and seeking alternative strategic investors. Our plans are to keep moving forward.”

The Portsmouth, N.H., startup raised $65 million in three funding rounds dating to August 2000 when the company was called Malachite Technologies (see Malachite Plans to Light Up SANs and Malachite Unearths $30M). After failing to close a $20 million round with a new lead VC, Sandial is looking for strategic investments from technology companies. Sources say switchmaker McData Corp. (Nasdaq: MCDTA) is among the companies talking to Sandial, although Welts wouldn’t confirm that.

Sandial executives had hoped the $20 million would be enough to take it to profitability. Welts says SanDial has 20 customers, brought in $1 million in revenue in the first quarter of this year, and has $3 million worth of orders on the books.Welts said there's an aversion to funding startups in the SAN switch market. "We came into this market against two established companies [Brocade and McData], and then along comes the little gorilla called Cisco.”

So why would another switch company look to prop up a competitor? Sandial says it's because it has technology the others lack. Sandial's Shadow 14000 Storage Backbone Switch uses time-division multiplexing to regulate bandwidth assigned to specific applications in a Fibre Channel network (see Sandial Switch Surfaces). That delivers a degree of quality-of-service previously lacking in FC switches.

Although Sandial’s technology might tempt another switch company, getting that technology into somebody else’s switch could be a problem.

"It’s a technology that’s desired by folks like McData," says analyst David Freund of Illuminata Inc. “Anybody interested will have to look at the patent portfolio and decide what it would take to implement that technology. Retrofitting it into existing designs can be extremely challenging.”

Sandial faced a challenging marketing strategy from the start. With Brocade, Cisco, and McData having a lock on major system OEMs, Sandial sells directly and through system integrators (see Sandial Clocks In and Sandial Comes Out). As a startup, it's tough to make inroads through that type of channel.“The prospect of accepting a new vendor at the core of the switch fabric is unnerving," says Freund. "People remember the problems with interoperability in the early days of Fibre Channel. Even today, the idea of mixing Brocade and McData is not for the faint of heart.”

Welts says market acceptance isn’t the problem. Sandial lists New Balance, Harte-Hanks Inc., and First Data Resource among its customers. He claims the timing is bad: The VC market is drying up after a brief spurt earlier this year (see It's Raining VC Money). Another switch startup, Maranti Networks Inc., picked up $26 million in a C funding round in February without any paying customers (see More Money for Maranti). MaXXan Systems Inc., another Sandial rival, is also believed to be working on a new funding round.

Referring to a Byte and Switch story from earlier this week on startups that have thrived without VC funding, Welts says, “Who needs stinkin’ VCs? Unfortunately we do.” (See They Don't Need No Stinkin' VCs.)

— Dave Raffo, Senior Editor, Byte and Switch