VCs Tag Hot Technologies

Question: What are the prime targets for venture capital investment in 2005?

Answer: Startups that help facilitate disaster recovery, ILM, or compliance, or support Remote Direct Memory Access (RDMA) over IP -- according to a couple of VCs looking to spread money around.

Storage startups pulled in more than half a billion dollars this year from VCs, and there doesnt seem to be any slowdown in sight for 2005 (see Storage Startups Top $500M). In the last month, one VC fund looking for storage startups got new money, and two others welcomed a prominent new player.

Updata Partners (NYSE: ARW) this week announced it pulled commitments of $154.5 million for a venture capital fund that will likely be invested in $2 million to $15 million allotments (see Updata Gets Partner). Storage is one of the fund’s main focuses, along with security and systems management.

Last month, former NuSpeed Internet Systems CEO Mark Cree joined two VC firms -- El Dorado Ventures

and Vesbridge Partners LLC-– as Entrepreneur-in-Residence (see Ex-NuSpeed CEO Joins VC World). Cree will focus investment opportunities in the enterprise networking, Web services, and security markets, but will keep his eye on the storage space.Updata general partner Tim Meyers says there will probably be more later-round investments in private storage companies next year than there were in 2004. As for storage investments, Meyers says Updata is looking for companies that can improve on technologies that already have a market.

“We like to have a company with a product in an area that somebody is already spending money on,” he says. “I’m not big on companies where engineers are building something in the garage and they think everybody will come to them. I call them ‘Field of Dreams’ companies.”

And what are the technologies VCs are interested in? Cree points to replication as one area, and identifies Constant Data Inc. and Mendocino Software as interesting startups in this area.

Meyers agrees that replication and data migration are hot, but he considers Softek Storage Solutions Inc. -- already in Updata’s portfolio -- a player in that space, and he isn’t looking for another.

Meyers says technologies that fuel ILM (information lifecycle management) and compliance are markets worth investing in -- but only if they improve upon the processes.“We’re looking for new inventions in a space that already has customers and demand,” he says. “And that new invention should do something better and faster. We’ve looked at a number of companies with products that define data in email, databases, and everyday applications, and then integrate that into a complete backup-and-recovery process.”

Cree, whose NuSpeed was an iSCSI pioneer that Cisco Systems Inc. (Nasdaq: CSCO) acquired in 2000, says the next “pot of gold” lies in RDMA over IP (see Cisco to Acquire NuSpeed Internet). This nascent technology extends the link used between processors inside servers. It enhances the link to operate over IP and removes much of the latency caused by TCP/IP. RDMA over IP is expected to eventually compete with InfiniBand in cost and efficiency, but Cree sees it becoming much more prevalent once 10-Gigabit Ethernet becomes more affordable in a few years.

“RDMA will allow iSCSI to jump ahead of Fibre Channel,” he says. “RDMA will completely blur NAS and SAN. The data you send can be files or blocks. There’s a world of opportunity there.”

Unlike replication, ILM, and compliance, the infrastructure isn’t yet in place for RDMA over IP. Cree says the surviving TOE startups -- perhaps Alacritech Inc.

or Silverback Systems Inc. -- have the technology to support it, but he would also be open to incubating a company to tackle the market.

— Dave Raffo, Senior Editor, Byte and Switch0