Storage Funding Finds Its Feet

The amount of VC money flowing into the storage sector is down from last year, though more and more startups are clinching late-stage deals to fuel IPOs and M&A activity.

Recent figures from consulting firm Ernst & Young and DowJones VentureOne highlight the buoyant nature of the overall U.S. venture market, which reached $7.4 billion in the second quarter of 2007, up from just over $7 billion in the first quarter and an increase of 8 percent on the same period last year. (See VC Investment Grows in Q1 and Venture Capital Funds Decline.)

IT-related deals, totaling $4.1 billion, made up more than half of the second quarter's total funding. That IT deal figure was up roughly one third from $3.1 billion in the prior quarter, and it represented a 10 percent hike above the same period last year.

Still, despite an apparent boom in technology funding, storage represents just a fraction of these overall figures.

VentureOne's research reveals that storage-related financing accounted for $164 million in the second quarter of this year, up about 64 percent from just under $100 million in the prior quarter, although 21 percent below the $207.6 million recorded by VentureOne in the second quarter of 2006.Nonetheless, while representing a small part of the overall venture funding landscape, storage startups have been busy in recent weeks, with Qlusters, InovaWave, Certeon, and Exanet all bringing in cash. (See Qlusters Closes $10M Series C, InovaWave Clears Fresh Funding, Certeon Ascertains $15M, InMage Ingests $10M, and Exanet Nets $18M.)

DowJones spokesman Adam Wade explained that despite the apparent funding slowdown, there is a marked change in the nature of the data storage deals being secured. "We're seeing more and more late-stage deals. In fact, this last quarter we saw the highest number of late-stage deals we have on record for a quarter with 160," he said. "[It is] companies grabbing that last little bit of financing they need before approaching an IPO, or filing for one in hopes of raising attention among buyers."

Recent months have certainly seen a flurry of IPO activity from storage-related vendors, with Voltaire, BladeLogic, Double-Take, Data Domain, Compellent, and VMware all heading down the public path. (See Voltaire Strikes IPO, BladeLogic Announces IPO Pricing, Double-Take Files for IPO, Data Domain Closes IPO, Compellent Preps for IPO , and EMC Still Rules VMware.)

As ONStor picked up $27 million in a mezzanine round, CEO Bob Miller told Byte and Switch that this money will be used to take the firm public sometime within the next 12 months, although at least one analyst feels that the startup may have an additional agenda.

"I think it makes sense in some way for them to stay independent rather than get bought by somebody," Forrester research analyst Andrew Reichman says.A scan of funding stories on Byte and Switch appears to tally with the VentureOne research. This year, VCs invested at least $468.4 million in a range of firms. Among the year's biggest takes are the $27 million scored this week by ONStor; $22 million by Sepaton; $21 million by Expand; $17 million by Mimosa; $113 million by Force10; and $18 million by Exanet. (See ONStor Secures $27M, Eyes IPO, Sepaton Scores $22M, Expand Gets $21M, Mimosa Raises $17M, Force10 Round Hits $113M , and Exanet Nets $18M.)

Storage startups are popping up in a range of areas, but particularly ones focused on optimizing the footprint and bandwidth required to store data. VCs are clearly looking to fund firms that solve immediate problems, such as email archiving, NAS management, and WAN optimization. The following tally of recent large fundings exemplifies this trend.

Table 1: Selected Funding of Storage-related Startups, 2007

Speaking of startups, Byte and Switch will be updating our quarterly Top 10 Startups to Watch. We'd like your input. To be considered, startups must:

Of course, we're full of ideas about who's hot and who's not. But we'd love to hear yours. Send your comments and suggestions to us at [email protected].James Rogers, Senior Editor, and Mary Jander, Site Editor, Byte and Switch