BlueArc Returns to Trough

BlueArc is at it again. The high-end NAS vendor returned to the VC well for $29 million in funding. The round comes one year after BlueArc grabbed $15 million. Its total funding stands at $204 million. (See BlueArc Pulls In $15M More.)

BlueArc CEO Mike Gustafson plans to use most of the new cash to expand sales and marketing with product development also on the list. But he won't say for sure whether this is the last funding round for BlueArc. "I'm very comfortable this funding round will get us through profitability," he says. "If we take more, it will be for growth -- like this round."

According to Gustafson, BlueArc will expand into new geographic areas, such as Europe and Asia-Pacific, and pursue new partnerships and licensing deals to add functionality to its NAS platform. The company has already been hiring aggressively the past two quarters and expects to expand headcount from 150 now to 175 by the end of the year.

It's a familiar scenario by now, one that's been repeated for more than three years: BlueArc gets funding, predicts profitability and possible IPO in coming months. (See BlueArc Wallows in $47M Haul and BlueArc Still Hot for IPO.)

Perhaps next year will actually see BlueArc reach the goal of profitability. BlueArc claims more than 160 customers and has won high marks from analysts and customers with its new Titan 2000 systems rolled out in February. (See Genome Sequencing Center at Washington U. and BlueArc Beefs Up Titan.) But when will that success translate into a successful business model for a company whose primary competitors are EMC and Network Appliance?"It's amazing that investors keep giving them money," says financial analyst Steve Berg of Punk Ziegel & Co. "You have to think they'll have a little bit of a problem paying off all their VCs."

BlueArc's need for more money shows just how expensive it is to build a successful storage systems company. 3PAR picked up $30 million to bring its total to $183 million in April, and Larry Ellison's VC company poured $150 million into Pillar Data before it even delivered a product. (See 3PAR Picks Up $30M , Mike Workman, CEO, Pillar Data Systems, and Pillar Leaves Post At Last.)

New investor Morgenthaler Ventures led the latest round. And general partner Gary Morganthaler, who joins BlueArc's board, didn't rush in.

Morganthaler says his firm rarely invests in storage startups and looked at BlueArc for years before ponying up. "We had looked at them about two years ago," he admits. "Frankly, it was less clear then as to who would emerge as the winner of this space. There was a mad rush towards storage systems companies in the early 2000s, and a lot of people came and went away."

Why BlueArc now? "The technology is complete, it's there, it works," Morganthaler says. "It's not a case of an endless investment in trying to get the technology to work. The company is on a revenue path and growth path to transition to profitability over the next 12 months. At that point, is it a public offering, is it an acquisition? Generally, we build companies that are capable of operating successfully in public markets, but this market has delivered more acquisitions than public offerings."Previous investors Chevron Technology Ventures and Wasatch Advisors also joined the round.

— Dave Raffo, News Editor, Byte and Switch

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