Can $35M Save Sanera?

Who needs McData? Sanera's chairman says the company always meant to stay independent

July 3, 2003

4 Min Read
Network Computing logo

Depending on how you look at it, the $35 million funding announced by Sanera Systems Inc. this week is either an eleventh-hour bailout or the anticipated result of a long-term plan.

The firm's investors coughed up a third round of funding yesterday, bringing Sanera's total venture backing to $101 million. With production shipments of the DS10000 director switch expected to start this summer, the money is enough to bring Sanera to self-sufficiency, says chairman Alex Mendez -- who's also acting as CEO, since Larry Sanders resigned yesterday (see Sanera Gains $35M, Loses CEO).

Participants in Sanera's third round included previous investors ArrowPath Venture Capital, CMEA Ventures, Enterprise Partners Venture Capital, Goldman Sachs & Co., Greylock, and Storm Ventures.

Mendez, a general partner at Storm Ventures, says this was the plan all along: to keep Sanera independent until it became a force in the market. But the timing of the latest funding is interesting, given the recent scuttlebutt about a proposed acquisition by McData Corp. (Nasdaq: MCDTA).

Byte and Switch first reported in April that McData was considering the purchase of Sanera. Analysts cheered the anticipated addition of Sanera's high-end, 256-port system to McData's portfolio, saying it would give the company an edge over industry giant Cisco Systems Inc. (Nasdaq: CSCO) and enable it to capture a larger chunk of the Fibre Channel switch market.Subsequent reports, however, put the potential acquisition price at a disappointing $70 million (after initial speculation it would be up to $175 million) plus a possible $30 million in stock (see Sources: McData to Buy Sanera and Is McData Lowballing Sanera?). By June, it appeared the deal had stalled (see Switch Hits).

Now along comes another $35 million to prop up Sanera. Mendez won't comment on whether McData made an offer, but he does insist that Sanera doesn't want to be acquired.

"No, [keeping Sanera independent] was always planned. Market forces might have caused people to write certain things, but the truth is, the company's always been focused on having an independent destiny. That was always in the plan," he says.

The Enterprise Storage Group Inc. analyst Steve Duplessie, however, says that Sanera probably did consider a McData takeover but dropped the deal because the offer was insufficient. "I think the McData deal has come and gone," he says.

In any case, the new funding seems to be arriving in the nick of time. Last month, one source pegged Sanera's bank balance at less than $3 million."I think having $35 million is much better than not having it," Duplessie says. "That's a pretty good chunk of change."

If Sanera isn't for sale, it doesn't seem much of a stretch to assume the company's got IPO aspirations. Mendez admits as much but says he doesn't obsess over it; in baseball talk, he wants Sanera to take it one game at a time. "I know that sounds clichd, but I did that for 10 years at Stratacom, and the company was worth $4.4 billion when Cisco bought it."

Key to the funding is that beta trials for the DS10000 are going well -- "If the product weren't working, we'd be having a different conversation," Mendez says.

As for Sanders, "Larry is at a point in his life where he's going to focus on personal things. The relationship between us is excellent, and it's more about what Larry wants to do right now." It's quite similar to the story that came out when a Sanera founder left last year (see Sanera Founder Quits).

In light of the funding announcement, however, Sanders's departure is very suspect, Duplessie says: "That's weird. Typically, if your CEO’s going to leave, you're not going to get $35 million... I'm guessing that means that the CEO didn't really resign."Funding and CEO questions aside, Sanera still faces a tough battle against competitors, including Brocade Communications Systems Inc. (Nasdaq: BRCD), Cisco, and McData, as well as startups like Maranti Networks and Sandial Systems Inc. Also in the ring is CNT (Nasdaq: CMNT), following its acquisition of Inrange (see CNT Walks Off With Inrange and CNT Flings FC Far & Wide).

Mendez says that starting from scratch has made Sanera's architecture better suited for high port counts. "It's a very hard problem to build a very large, reliable storage fabric. Compare us to any terabit router company on the planet, we're up there with them."

Fellow investors might hope for better, actually, as terabit router startups are notorious for burning nine-figure bankrolls without selling any products (see Pluris Shutdown Confirmed).

— Craig Matsumoto, Senior Editor, Light Reading,and Eugénie Larson, Reporter, Byte and Switch

Stay informed! Sign up to get expert advice and insight delivered direct to your inbox

You May Also Like

More Insights