Startups Tap VC Reserves

Funding News-O-Rama! The venture capital community is back in action, as four storage networking startups have pulled in a total of $56 million among them. What's got the VCs all atwitter?

Storage processor startup Aristos Logic announced today the completion of a $20 million dollar round led by Woodside Fund. Also today, IP storage startup LeftHand Networks announced a $20 million investment, and LiveVault Corp., an online backup and recovery service provider, said it has secured $10 million. One of LiveVault's competitors, EVault Inc., closed on $6 million last week (see Aristos Logic Raises $20M, LiveVault Locks in $10M Series B, LeftHand Snatches $20M, and EVault Raises $6M Series C).

What's got the VCs opening their wallets, then? Is it the weather? [Ed. note: Spring has finally sprung on the East Coast. For now.] Or could there be macroeconomic changes afoot?

But you'd have no luck finding hints of a recovery in this spate of funding, say the venture capitalists we spoke with. "The marketplace for enterprise storage is still brutal right now," says Kyle Lefkoff at Boulder Ventures, an investor in LeftHand.

However, he says some startups are getting customer traction despite the slow economy. "IP SANs are a generational shift that would take five years in a good economy... But this is going to be a major trend, and LeftHand is winning business today."Others are more skeptical, pointing out that VCs have to put their money somewhere. "The reality is, there is a vast swath of venture money out there that will overpay for revenue traction," says Joe Tango, venture capitalist and dance instructor at Highland Capital Partners. "What's unclear is whether these companies will achieve enough to be profitable and large enough to be meaningful businesses."

Chris Baldwin, partner at Charles River Ventures, reckons the funding is representative of traction in the specific sectors these startups play in and doesn't necessarily mean a change in general storage spending patterns. "Naysayers are expressing their views, but IP storage is real," he says. "There's also clearly a need there for scaleable SAN chips... and small-to-medium-sized business will pay for LiveVault's backup-type services."

For its part, Aristos Logic says it's close to announcing design wins with several storage system OEMs for its FibreSlice storage processor. FibreSlice chip and software offers RAID functionality plus an application programming interface (API) that allows existing storage management software products to talk directly to the chip without administration.

"Using failover as an example, our chip executes RAID, versus the administrator getting into the mechanics of mapping RAID volumes from one disk to another," says Anil Gupta, president and CEO of Aristos Logic. The company claims this produces an order-of-magnitude greater performance in terms of I/O Operations Per Second (IOPS).

Boulder's Lefkoff agrees there is definitely an industry-wide trend toward more integration and creating more functionality embedded in system-level products. "These functions are being taken out of software and moved into hardware for better performance," he says. "More integration equals lower cost."In addition to Woodside Fund, Aristos Logic's latest round of investors included J.P. Morgan Chase Bank & Co., TPG Ventures, QTV Capital, and Macnica Inc. of Japan. The startup will use the investment for sales, marketing, and production of its first chip, which is expected to ship in volume by yearend.

Meanwhile, LiveVault's second round was led by Sevin Rosen Funds and included participation from existing investors Matrix Partners, Atlas Venture, Adams Street Partners, Iron Mountain Inc., and others. The company says the funding will tide it over to profitability; it brings the total raised by LiveVault to $20 million since late 2001 (see LiveVault Debuts Backup Service and LiveVault Swaps Out CEO).

Not everyone has been able to tap these VC reserves. Startups still looking for cash include Paceline Systems Corp., SAN Valley Systems Inc., StoneFly Networks Inc., TrueSAN Networks Inc., YottaYotta, and Zambeel Inc. (see SAN Startups on the Block, Paceline Angles for Buyout, YottaYotta's Gotta Problem, and StoneFly Takes Second Crack).

"We have to wait until all the companies in hibernation are flushed out and VCs start taking the losses before we know who will really survive," says Cheng Wu, a high-tech entrepreneur and angel investor (see Cheng Wu Quits Cisco).

Jo Maitland, Senior Editor, Byte and Switch