StoneFly Fights for Survival

While a few iSCSI startups are seeing positive results, one of them needed a cash influx to survive. And the survival might be in name only.

StoneFly Networks, which hasn't been able to generate any funding since June 2003 -- and lags behind rivals EqualLogic, LeftHand Networks, and Intransa in sales -- received money to keep it going but maybe not for long. The money comes from an unlikely place: small storage startup Dynamic Network Factory (DNF).

It remains to be seen how much of StoneFly will remain, if anything. StoneFly notified shareholders that DNF plans to pay $205,000 for StoneFly's assets and liqiuidate the company. But the CEO of DNF, Mo Tahmasebi, says DNF is only investing in StoneFly and StoneFly will continue to operate as an independent company. Both StoneFly and DNF will sell StoneFly's OptiSAN and ValueSAN iSCSI products, Tahmasebi says. DNF already sells iSCSI systems as well as Fibre Channel SANs and NAS.

"StoneFly is still an independent company," Tahmasebi explains. “Basically, it's a strategic partnership. We've made some investment in the company.” He wouldn't divulge any specific dollar amount.

The letter to shareholders from StoneFly said the startup has been looking for buyers since July, and received offers from DNF and another private company in northern California. Some say it's just a matter of time until DNF pulls StoneFly under its banner."Sounds like a slow takeover," says one storage analyst.

If so, it's also been a quiet one. A StoneFly OEM partner and customer told Byte and Switch they had not been notified of a pending deal. Calls to StoneFly's headquarters went unanswered. Tahmasebi says the StoneFly board will determine who runs the company and who stays on. CEO Bill Atkinson, who joined StoneFly in January, is out. (See New CEO at StoneFly Networks.)

"There will be changes," Tahmasebi says when asked who's in charge of StoneFly.

For now, director of operations Dennis Hergert is running StoneFly. Hergert, who has been with StoneFly for more than four years, says the company will maintain its engineering, systems integration, and tech support operations at its San Diego headquarters.

"I can assure you that the same people will be answering the phone and developing the products as did all through 2005," Hergert said in an e-mail message.StoneFly was among the IP SAN pioneers with an IP gateway in 2002, but the market was slow to take off.(See StoneFly Takes Second Crack and StoneFly Supports iSCSI.) By time it did, at least three other startups eclipsed StoneFly. Meanwhile, established Fibre Channel vendors EMC, Hewlett-Packard, IBM, and Network Appliance have begun to offer iSCSI.

StoneFly picked up $34 million over three rounds of funding, but has gone more than two years without any additional funding. At the same time, EqualLogic, Lefthand, and Intransa have all closed rounds of at least $20 million. (See Startups Bask in Summer Sums).

"Fourth among startups isn't all that good in that market," says analyst Steve Berg of Punk Ziegel & Co. "StoneFly got a decent amount of buzz at the start. They should've been able to get out there, and they couldn't."

Rather than change its architecture, StoneFly tried to add features -- such as disk-to-disk backup and high availability -- through partnerships with companies such as CommVault and XOsoft. (See StoneFly, CommVault Hook Up and XOsoft & StoneFly Sign.)

Tahmasebi says StoneFly's partnerships will remain intact, and he expects to add larger enterprise systems to its product line. He says the plan is to add systems that scale to more than 20 Tbytes. StoneFly's largest system now is 7 TBytes."We're looking at a larger and better StoneFly," he boasts.

Tahmasebi explains that self-funded DNF has been profitable for five years. Although he has big plans for StoneFly, he says he has no interest in running the company. "I haven't applied for a job there. I already have one," says Tahmasebi.

— Dave Raffo, Senior Editor, Byte and Switch

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