Quantum Technology Ventures

Perhaps it is better to be great than to be understood. But E. Maurice Domengeaux, a managing director of Quantum Technology Ventures, is keen to clear up a misconception that he believes many in the storage industry have about his venture fund.

Domengeaux, who goes by "Maury," wants you to know that QTV is not your usual, conservative corporate investment group.

"People dismiss corporate investment funds as somehow being not smart money," he says. "But we function much more as an independent fund that happens to have a corporation as a partner."

With $70 million in capital, QTV is a relatively small player, compared with some of the larger technology-oriented VCs. And with less than two years under its belt, it's impossible to gauge QTV's track record. But clearly, it has the most concentrated focus on the storage industry of any other investment fund. QTV has invested a total of $30 million in 18 companies since its inception in March 2000, and 13 of those are storage or storage-related startups. Its portfolio includes 3ware Inc., Alacritech Inc., Confluence Networks, Nishan Systems Inc., and Rhapsody Networks.

Based in Santa Clara, Calif., QTV's sole limited partner today is Quantum Corp. (NYSE: DSS), a maker of tape drives and network-attached storage (NAS) devices.And it's that tie to Quantum that throws people off about QTV, says Domengeaux. Among other VC firms targeting the storage industry, QTV is assumed to be just another corporate investment arm. When asked for his thoughts about QTV, a senior associate at a big VC says this: "My impression is that they have a strategy of investing a few million dollars in some of the Series B and C rounds for companies they think have good momentum, which can work very well in a rising market."

Domengeaux says he isn't surprised by that attitude. While he acknowledges that QTV has participated in several late-round investments, he says that's not its focus. What people don't understand about QTV, he says, is that it operates completely independently of Quantum. In other words: more like an aggressive VC than a passive corporate investor. Domengeaux adds that QTV is in discussions with other partners about contributing to its fund including, he claims, a "billion-dollar fund-of-funds" that is exploring storage sector investment.

"We tend to be early money, stay through several rounds, and get highly involved in the companies," he says.

As examples of QTV's active approach to its investments, Domengeaux points to Confluence Networks, a virtualization appliance startup, and Z-force Inc., which is making a NAS virtualization device. "We had a substantial impact on the Z-force strategy and business plan," he says. "We are hands-on, operational people that have founded divisions and started lines of business."

Here are the 11 storage startups QTV has invested in (excluding two that are in stealth mode, which Domengeaux declines to identify):Table 1: Quantum Technology Ventures' Storage Investments

Steve Foster, general partner at TPG Ventures, which invested in Aristos Logic and Sierra Logic Inc. with QTV, says that what QTV's investment partners bring to early-stage startups is real experience from the storage industry.

"They know an awful lot of people, and they have instincts about what will actually sell in the market -- and what it will take to get adopted by the big OEMs," Foster says.

Domengeaux joined QTV in March 2001 from Rivio Inc., an application service provider (ASP) targeting small businesses, where he headed marketing and sales. Prior to that, he was in charge of marketing Quantum's Snap network-attached storage line, and he also spent three years at PC storage peripheral maker Iomega Corp.

QTV's three other principal investors are Randy Meals, formerly the COO of Nishan; Steve Schlossareck, previously director of business development at Quantum; and Roy Vella, also previously at Rivio, among other startups.Because they're alumni of storage companies, the QTV'ers have rich insight into picking truly differentiated storage startups, says Steve Duplessie, senior analyst at The Enterprise Storage Group Inc.

"QTV is hyperactive in this space," Duplessie says. "They have the luxury of already being a player in the storage sector, so they look to fund companies that have the ability to hit solo home runs as well as help their existing businesses. Having a truckload of engineers gives them the advantage of being able to deep dive into the technology that the potential portfolio company has, so they can weed out the crazy from the possible."

And there are definitely some ugly mutts rambling around, Domengeaux says.

"You see a lot of bad deals out there," he says. "I can't tell you the number of virtualization proposals we've seen in the last quarter. We have to tell them, 'Well, that was two years ago, not now.' "

QTV expects to invest in about nine companies in 2002, which would keep them on their pace to date. What do Domengeaux and his team look for in a storage startup? "Fundamentally, you have to understand if the team is solid, if the team is capable of executing," he says.Well, right. But in terms of technology, Domengeaux says, QTV is keyed into three trends: the general migration from direct-attached storage (DAS) to networked storage; storage security; and content-aware infrastructure.

As to the prospects of its current holdings, Domengeaux is (need we state the obvious?) naturally quite upbeat. And he is optimistic that there will be an uptick in acquisitions of startups by the big storage and networking players (see Cisco Reaffirms SAN Strategy).

"We think in the next 12 to 18 months you'll see acceleration in acquisitions," he says. "Corporations have had tremendous layoffs and they've cut back substantially on new product development. As the economy turns around, you can't just hire an R&D team and have a product in 12 months, so we think companies are going to turn to startups to get new technology."

As we said, it's still much too soon to tell whether QTV's holdings will pay off. But if its companies ever start to gather serious traction, QTV will make it on the map as the biggest fish in the storage-startup pond.

— Todd Spangler, Senior Editor, Byte and Switch
http://www.byteandswitch.com