The Next Hot Sector Is SANtastic

Don?t be fooled by the market slowdown. There?s still tons of venture capital to be had, so long as you?re pitching an offer sheet for a data storage area network company.

This next-big-thing sector, which IDC Research estimates will grow from $8 billion this year to $34 billion in 2004, was all over the deal wires last week as it received approximately $100 million worth of VC disbursements for companies like BlueArc Corp., SANgate Systems and MaXXan Systems Inc.

While die-hard dotcom entrepreneurs and optical component manufacturers might be dumbfounded by their recent downgrade to has-been status, analysts are not surprised by the VC interest in data storage networking.

“It?s hot right now. Like electricity, no matter how bad the market is, I am not going to shut off my company?s lights, just as I am not going to stop storing information,” said Galen Schreck, an analyst with Forrester Research.

He added that, despite all of the VC dollars flowing into the sector, there are still plenty of opportunities for new or existing companies to streamline the process.

BlueArc, which just raised a whopping $72 million, claims to have carved out a niche by providing customers with a server that allows them to work at significantly higher speeds than they could with its competition?s servers.

“[Our speed] puts us into an absolutely different league,” said Enrico Pesatori, president and chief executive with BlueArc.

He added that his company?s focus on mid-market customers acts as an additional differentiator, even though Network Appliance Inc. has 50% of the mid-market share and EMC Corp. has another 30%.

Schreck said some of the newer folks like BlueArc and Cereva have hit a “pain point but don?t have the maturity that companies like EMC have, which will make it difficult for them to compete.”

Winning market share does seem tough but Weston Presidio, which led BlueArc?s Series C deal, is not concerned. The San Francisco-based VC committed a little less than $25 million to BlueArc, and pegged the issuer?s post-money valuation at just over $300 million.

Follow-on investors include Celtic House International, Patricof & Co. Ventures and Apax Partners & Co. Also joining this round of funding were Dell Ventures, EUROQUBE, New York Common Retirement Co-investment Fund advised by Pacific Corporate Group, JPMorgan Partners and Fort Washington Capital.


BlueArc has initially set out raise $40 million, but took on the extra investments because it wanted to protect itself from further market deterioration. If the markets end up rebounding, however, Pesatori said BlueArc could be an IPO candidate for next year.

On the other hand, Schreck considers the company to more likely find liquidity through M&A, along with another one of last week?s funding winners: SANgate.

Southborough, Mass.-based SANgate received $7 million from Jerusalem Venture Partners and another $3 million from Battery Ventures in its Series B round. The money will continue funding the development of the organization and building out the company?s business in the U.S.

The company claims its appliance is unique because it enables customers to perform remote mirroring, point-in-time copies and data migration using any vendor?s storage subsystems, but its management team is not under any delusions of grandeur.

Paul Feresten, one of SANgate?s cofounders, said that currently the company?s intention is to build and grow a successful company, but he also expects to forge partnerships with other industry leaders in the future.

“They are one piece of a total solution,” Schreck said. “Companies like EMC, Hitachi, Compaq and IBM will continue to provide lots of high-performance storage for applications like SAP and Oracle, but there are niches for other vendors. If a company gets distracted by too many point solutions, the overall management complexity and cost can become unwieldy. A lot of these guys are working on just one technology. SANgate has a single product that will later be acquired and integrated into a larger offering.”

Larger offerings are already on the table. While neither company has lost its own identity yet, storage providers DataCore Software and SAN Valley Systems have aligned themselves to integrate storage consolidation services across metropolitan and area wide networks.

“Corporations are reeling from the increasing problems of backup and capacity allocation across highly dispersed networks outstripping both resources and budget,” said Ken Horner, vice president of marketing at DataCore. “By working with SAN Valley, we can offer joint solutions to the SAN marketplace.”

Although consolidation may be where the market is heading, that didn?t stop VCs from funding more one-solution storage companies.

San Jose, Calif.-based storage company, MaXXan, just finished its first institutional round of venture funding for $26 million. Venrock Associates and U.S. Venture Partners jointly led this round, with each committing $13 million.

The current funding is expected to help get the company through the product development phase. Then Silva expects to do another round of funding next year when it is ready to bring the product to the marketplace.

Hopefully, for the VCs? sake, by the time these companies make their way to the marketplace the more established companies won?t have pulled to far ahead.

In the VCs? favor, Schreck did say that while some companies do have a temporary market advantage and some have long-term advantage, there is no clear winner just yet. And there is always room for people that can bring something to the table.

William Hurley, program manager at The Yankee Group, agrees. “This industry is exploding and everyone is trying to capitalize. Alone these companies do not pose a threat to the big players like EMC, Intel and Sun; they are targets for acquisitions on their own. But if they band together they will pose a threat to the incumbents.”

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