VCs dig virtualization

When Hyper9 takes its flagship application out of beta mode this week, it’ll have $8 million to help in the transition.

Last week, the Austin-based company, which develops software tools for IT managers in virtualized environments, raised an $8 million Series B round of funding led by Venrock, which was joined by Matrix Partners, Silverton Partners and Maples Investments. With the new round, the company has now raised $16 million since its founding less than two years ago.

Hyper9 CEO Chris Ostertag attributes the sharp ramp up from seed stage to Series B, in part, to escalating demand for troubleshooting tools by companies using virtualization (a computing technique that involves creating a virtual version of an operating system, server, or other device that performs the functions of its physical counterparts.)

“This whole specialized space of virtualization has created opportunities for new styles of systems management,” says Ostertag, who’s pursuing a patent for Hyper9 on a technology he calls “VM DNA,” which identifies and tracks what’s going on in a virtualized machine.

Judging by recent venture activity, it’s a growth market. Hyper9 is one of the several companies with virtualization-focused business models that have raised private funding this year. The others include:

Egenera, which develops tools for managing virtualized data center infrastructures, raised $12 million in January from American Capital Strategies and Spectrum Equity Investors, according to Thomson Reuters (publisher of PE Week).• Open Kernel Labs, a provider of virtualization technology for operating systems, raised $7.6 million in January from Chrysalis Ventures and Neo Technology Ventures.

• And Xkoto, a developer of tools to allow multiple servers to access the same data, which recently closed a $3 million round backed by GrowthWorks and GrandBanks Capital.

Founders of Hyper9 managed to secure funding before posting revenue. The company currently has about 120 companies active in its beta testing, with each running somewhere between 50 and tens of thousands of virtual machines.

As it emerges this week, the company is planning a subscription-based model, in which customers pay $25 a month per hosted machine for a 12-month subscription. The average customer, Ostertag says, has at least 20 hosts.

The payoff for customers, according to Hyper9’s pitch, is in time savings for system administrators. Currently, Ostertag says, administrators spend about 80% of their time identifying the root cause of problems in virtualized environments, leaving only about one-fifth of their time to actually fixing problems.

Using Hyper9’s applications, Ostertag says, “We can take a guy who might spend three or four days trying to analyze a problem, and reduce it to an hour.”

While it’s unclear yet whether such tools will actually save time on a large scale for overworked IT administrators, analysts say there is measurable interest in new applications. In a February report, researchers at IDC found that companies with larger scale virtualization deployments “are demanding more sophisticated tools to help manage these environments.” —Joanna Glasner