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VCs Take $100M Bite Out of Jamcracker Despite Skepticism

Refuting earlier concerns that its debut on the Web-based software outsourcing scene was premature, Jamcracker Inc. is expected to announce tomorrow that it has secured $100 million in a Series B round of financing.

The oversubscribed deal, led by Soros Private Equity Partners, included $85 million in preferred stock funding and more than $15 million in equipment financing. First-time investors Bay Partners, Credit Suisse First Boston, e4e Inc., Goldman Sachs, Morgan Stanley Dean Witter, Pivotal Asset Management, Robertson Stephens and The Rolling Thunder Networks participated in the transaction.

A handful of Jamcracker’s existing investors also came on board for the Series B Round, including First Analysis Corp., Internet Capital Group, and Navis Partners.

GATX Ventures Inc. led the equipment financing portion of the round, and was joined by Third Coast Capital, Transamerica Business Credit Corp., Sand Hill Capital and Western Technology Investment.

The company has not disclosed the exact amounts of the investors’ individual contributions to the round, although Jamcracker CFO and co-founder Harold Chen did comment that Internet Capital Group, which led the company’s $42 million Series A round last year, represented a significant portion of the second-round commitments.

Banner Debut

Some might say Sunnyvale, Calif.-based Jamcracker is having a red-letter year. Following its official launch in February, the start-up was named to Fortune‘s list of Cool Companies 2000 and Red Herring>‘s list of 100 Most Important Companies.

And while it hasn’t yet generated a profit, its technology is certainly catching on.

Jamcracker targets small-to medium-sized companies that have between 100 and a few thousand employees. The company offers software applications for email, expense reports, benefits administration and remote exchanges so IT managers and administrators can access them 24 hours a day, seven days a week through a secure, customized, Web portal called Jamcracker Central. Customers pay Jamcracker a monthly fee to manage their software and enable employees to access applications on the Internet.

To alleviate the headaches associated with managing several different service provider relationships, Jamcracker has also partnered with more than a dozen application service providers, which charge customers monthly for software use instead of selling them a license for one lump sum.

“In essence, Jamcracker has integrated many different application service providers’ technologies into one platform, making it easier for customers to access applications they wouldn’t ordinarily have the bandwidth to access themselves,” Chen said.

From a competitive standpoint, Chen also argued that Jamcracker’s technology and service delivery are unparalleled. “We have few, if any, competitors that can deliver on the same level we do,” he noted. “We wouldn’t think our model was such a great idea if other companies came along and tried to duplicate us.”

Surpassing Expectations

Besides, the “look before you leap” theme is all too familiar to Jamcracker Founder and Chief Executive K.B. Chandrasekhar. He faced similar skepticism when he started Exodus Communications. Naysayers warned that no company would ever buy into the idea of outsourcing its Web servers, citing security issues and cost as the chief barriers.

Despite Fortune Magazine’s observation in its June issue that Jamcracker might be entering the market too early – at the time, it had only 10 customers whose monthly fees ranged from $60 to $200 per employee, depending on the number of applications they accessed – the company claims to be thriving.

Now, Jamcracker has more than 50 customers – including partner relationship management company ChannelAutomation and Crescendo Ventures – and nearly 300 employees. In fact, Jamcracker is planning to move its headquarters to a larger office space in Cupertino, Calif., early next year. This will be it its fourth move since July.

Jamcracker also recently finished setting up 11 sales offices across the country and expects them to fully operable by the end of the fourth quarter.

The company plans to use proceeds from its Series B Round to fund an international expansion sometime next year.

“We’re still trying to find the sweet spot for application service providers in Europe,” Chen said. “We’re still in early-stage evaluations of the marketplaces, but the U.K., Germany and the Netherlands are good possibilities. It’s really a matter of finding and partnering with application service providers in those regions.”

The rest of the funding will be used to build Jamcracker’s technology platform, augment support infrastructure, lease space for data centers, expand its regional sales and support offices and purchase hardware and software.

The company has no immediate plans to return to the venture capital market for additional funding, but it hasn’t completely ruled out another dip into the private equity pool.