Santa's Early for SAN Startups

How's this for holiday cheer: Within the last month, almost $130 million has been invested in technology startups targeting the storage networking sector. Thats on top of the $2.4 billion already invested in over one hundred companies now jostling for position in this marketplace (see Venture Capital Survey).

Have the VCs lost the plot completely? Or are there still sectors of this market that are worth sinking more investment into?

Table 1: SAN startups funded - 11/20/01 - 12/20/01

”Where there is significant customer pain, that’s where the investment should go. [That pain] is still very evident in storage,” says Jo Tango, a VC at Highland Capital Partners.

However, he notes that there is a “major disconnect” between the types of companies the VCs and entrepreneurs are creating and what end users will actually buy. “Customers tell us that much of what is being developed today they won’t need for several years.” Case in point: 10-Gbit/s iSCSI chips, he says (see Siliquent Secures $10M for 10-Gig Silicon ).On the plus side, the majority of VCs say that in their talks with CIOs, the only part of the IT budget that is continuing to grow is for storage.

“Companies are just coming to the realization that they may need a storage strategy, and this realization has been sped up by everyone hearing about disaster recovery and business continuity,” says Paulina Rychenkova, a research analyst at Charles River Ventures.

”This naturally leads people to take a second look at what they are doing with storage. So there is plenty of steam left in this market as a whole,” she says.

According to several VCs we spoke with, investment hotspots include startups specializing in IT contingency and disaster recovery plans, particularly offsite resources. Products that support these trends, including redundant systems and applications for backing up copies of data, will be important next year.

Another potential hotspot might be storage management. For the most part, Rychenkova says, administrators still rely on individual product interfaces to manage network devices, storage devices, and the applications associated with them. “These management tools that exist today are pretty rudimentary, virtualization being an example of a tool, not a solution to the overall management problem."Consequently, she says, a potential area for investment would be a unified platform that ties these disparate interfaces together.

Some observers say the investment going on now is nothing more than a temporary blip for the IT industry in what may still be a long ice age. “We can’t suspend disbelief forever,” says Tango. “And at this rate of investment, the shakeout in the storage market could be brutal.”

For more on new storage networking startups, see Aristos Arrives, NextGig Gets Going, Lane15 Lines Up $12M, Exanet Lands $17M, Maranti Scores $25 Million, Z-force Is With Us, Nishan Secures $10M Debt Financing, and Storigen Clinches $15M in Funding.

— Jo Maitland, Senior Editor, Byte and Switch
http://www.byteandswitch.com