Funding Valve Is on Low

Venture capital funding is up but it's trickling, not gushing, into the hands of needy storage companies.

IP SAN startup Sanrad announced an $8 million funding round today, and another handful of storage companies should follow in the coming weeks (see Sanrad Closes $8M Round).

Upcoming announcements are expected to be relatively small, like Sanrad's round, compared to funding earlier this year. Companies expected to close deals soon include IntraDyn Inc., MaXXan Systems Inc., and Neustream Inc. Others actively seeking funds are SANchips and Sandial Systems Inc.

Though VC funding is way ahead of last year for storage companies (see VCs Shell Out for Storage), there are indications that the second half of the year won't be as strong as the first half (see It's Raining VC Money).

Only two storage companies received funding last month: Disaster recovery software startup XOsoft closed on $9 million, and advanced switching company StarGen Inc. picked up $8.5 million (see XOsoft Raises $9 Million and StarGen Gets $8.5M in Funding). Both rounds were the fourth for those companies.That's down from July of 2003, when six storage companies pocketed a combined $141.7 million in funding (see Can $35M Save Sanera?, Viva iVivity?, BlueArc Wallows in $47M Haul, Revivio Lands $20.7M Series B, Compellent Compiles $14M More, and StoneFly Banks $12M Round). Still, this year is set to the first since 2000 to see a year-over-year uptick.

Bottom line? While the market outlook has improved, it's not yet great. And while money is more readily available, the lessons of the bubble era appear to have both VCs and startups treading carefully.

"A year-and-a-half ago we looked and funding was impossible," says Sanrad CEO Uli Gal-Oz. "But we saw very good traction in the first quarter of this year. I didn't want to do a large round, because we didn't want the dilution to be that big."

Gal-Oz spoke to five VC firms and got most of the round from Sequoia Capital, with Israeli incubator the RAD Group also participating. Gal-Oz says Sanrad will use the funding to expand sales, marketing and support, and develop its worldwide headquarters in California (see Terminator Pumps Sanrad).

The company is planning to add 300 jobs in Silicon Valley over the next five years. Sanrad's only previous funding since it was founded in Israel in April 2000 was $7 million from the RAD Group and $5 million from the Israeli government (see Sanrad Comes to America).The improved, if cautious, VC atmosphere has other companies that have never received funding on the lookout. Sources say backup appliance vendor IntraDyn and NAS/SAN startup Neustream are about to close funding rounds – though both have had success without VC funding (see They Don't Need No Stinkin' VCs).

At least one source says intelligent switch maker MaXXan will soon score its first funding since December of 2002 (see MaXXan Mixxes Message). MaXXan has been more successful than its rival Sandial, which has come up short in a bid to raise $20 million and is now looking for a buyer or strategic investor (see Sandial's on the Clock ).

SANchips is also seeking funding, and though scuttlebutt has it that there's no deal yet, a company source says they hope to close by mid August (see SANchips).

— Dave Raffo, Senior Editor, Byte and Switch