Sepaton Gets Resuscitated After Nearing Last Gasp

Sepaton Inc. today will announce that it has raised $23.5 million in Series D funding. Not a bad turnaround, considering that investors almost pulled the plug 15 months ago.

Southborough, Mass.-based Sepaton was founded in early 2000 as SANgate Systems Inc., a storage area networking company focused on the crowded mainframe space. It received a combined $18.25 million in Series A and Series B funding from Battery Ventures and Jerusalem Venture Partners (JVP), but the VCs soon became disenchanted with SANgate CEO Alan Davis. They forced Davis’ resignation, and replaced him in June 2001 with former EMC Corp. executive Doron Kempel. Three months later, EMC sued Kempel for breach of contract and asked a court to remove him from his new post.

Tom Crotty, a general partner with Battery and a SANgate board member, testified in an affidavit that removing Kempel would “almost certainly force SANgate out of business.” In particular, he argued that the move would delay an anticipated Series C funding round by up to six months. The judge wasn’t swayed by the defendant’s testimony and told Kempel to pack up his office.

“Doron had only been there for three months when he was forced to leave, but he already had made some serious changes in management and company direction,” recalls Adam Fisher, a JVP principal and a Sepaton board member. “The company was already in turmoil, and then he was forced to leave, which left a giant void.”

Fisher and his fellow board members tried to fill the void one month later when they named former Gensym Corp. chief Patrick Courtin as SANgate’s third CEO. They also plied the company with $7.1 million in Series B-1 funding and began instituting a strategic shift away from a mainframe focus that never had generated much customer traction. Instead, the new plan was for SANgate to create solutions for the data migration market.

Despite the changes, prospective buyers remained on the sidelines and SANgate began to teeter on the edge of irrelevance.

In January 2003, Battery and JVP met to determine SANgate’s fate. One option was to simply shut the company down. But JVP remained convinced that there were still some assets – such as core hardware technologies and patents – that were worth salvaging. Battery decided not to go forward, while JVP invested $4.75 million into the company as part of a Series C recapitalization.

“We were given the opportunity to take over the company fairly easily,” says JVP’s Fisher, who would not reveal details of the arrangement. “Battery was a good non-party, because they made the deal attractive for us.”

JVP whittled the company down to nine employees, in part by shuttering a 22-person R&D facility in Israel. It also settled on the data protection market for its next strategic venture, and set to work on a speedy data backup and restoration product that would eschew the use of tape. In fact, the company even renamed itself Sepaton, which is “no tapes” spelled backward.

“A lot of the tape guys and storage guys are in this market, but we’re the only ones coming into it unbiased without tape revenue or storage revenue,” explains Mike Worhach, who joined the company as president and CEO last December (he also is an EMC vet, but has been gone long enough to be free of his non-compete agreement). “Our system focuses on what we call virtual tape,’ but also can provide other applications for IT pain points.”

The company began shipping its initial product late last year, which caused Pravin Vazirani, an associate from Menlo Ventures, to inquire about an investment opportunity.

Sepaton had been planning to raise around $10 million now and another $10 million in six months, but instead accepted Menlo’s offer to lead a larger Series D deal. The $23.5 million transaction was also included new investor Valhalla Partners and longtime backer JVP.

Vazirani and Hooks Johnston, a general partner with Valhalla Partners, will join JVP’s Fisher and Erel Margalit on the Sepaton board of directors. Tom Crotty and Ken Lawler of Battery Ventures resigned from the company’s board in conjunction with the January 2003 recap.

“We aren’t expecting to raise any more venture capital,” Worhach says. “This deal is expected to bring us to profitability.”