SAN Startups on the Block

Three storage networking startups -- SAN Valley Systems Inc., TrueSAN Networks Inc., and Zambeel Inc. -- are on their last legs and rumored to be engaged in acquisition talks, sources close to these companies tell Byte and Switch.

Representatives of the three firms did not return calls or emails requesting comment.

SAN Valley, which has been operating with a skeleton crew of around 15 employees, has been shopping for a buyer for at least a year, sources say. After failing to close the second half of its Series C round of funding last summer, SAN Valley's options have been pretty much limited to getting acquired -- or getting out (see SAN Valley Slips Into Ditch).

It sounds as if SAN Valley, which makes Fibre Channel over IP (FCIP) gateways, might have a buyer. "Someone wants the technology and a few of the engineers... Sun Microsystems Inc. [Nasdaq: SUNW] is said to be at the top of the list," says an insider familiar with the company's plans. Sun declined to comment on the speculation.

SAN Valley has been doing its utmost in the past six months to prove its worth to a potential acquirer. Quarter by quarter, the company has been demonstrating a constant trickle of orders for its products. Among other recent customers, it has lined up Seker Bank in Turkey and Cable & Wireless (NYSE: CWP) in the Caribbean (see SAN Valley Still Growing, Credit Union Installs SAN Valley, and SAN Valley Doubles Revenues).Whether this is enough to satisfy any interested suitors remains to be seen. But it's worth noting that Hewlett-Packard Co. (NYSE: HPQ) is one of SAN Valley's key resellers and has yet to come clean on its IP storage strategy. In addition, it can't hurt that Bob Coackley, president and CEO of SAN Valley, was formerly a senior executive at HP (see HP Takes iSCSI Baby Step).

Still, SAN Valley appears to be running out of gas. It has received a total of about $40 million in funding since April 1999 from Moore Capital Management Inc., Upstart Capital, Vertex Management Inc., Innovacom Venture Capital, Agilent Technologies Inc. (NYSE: A), and Cisco Systems Inc. (Nasdaq: CSCO).

Next up on the list of struggling startups is storage management software maker TrueSAN Networks. The startup allegedly turned down an offer of $5 million from CNT (Nasdaq: CMNT) for its intellectual property, according to a company insider (see TrueSAN Dishes Up Pink Slips).

San Jose, Calif.-based TrueSAN has raised a little over $30 million in two rounds, the second of which it closed in January 2001. Investors in the company include Woodside Fund, Merrill Lynch & Co. Inc., QLogic Corp. (Nasdaq: QLGC), JT Venture Partners, Credit Suisse First Boston Corp., Spring Creek Partners, and Finisar Corp. (Nasdaq: FNSR) (see TrueSAN Secures $30M in Funding).

"It looks like they are positioning to sell the intellectual property," our insider says. It wouldn't be the first time TrueSAN has tried to sell off its technology. The startup first entered the storage market with a SAN-in-a-can storage array and switch combo -- the Palladin -- but when this failed to sell, TrueSAN's president and CEO Tom Isakovich dumped the technology and switched to selling storage management software instead (see TrueSAN Takes Second Shot).According to another source, the company is definitely up for sale. "Isakovich is a mercurial guy and sold what he had once developed," the source says. "He has been trying to sell his company -- or its intellectual property, the SAN operating system -- to EMC Corp. [NYSE: EMC] and others for some time."

TrueSAN appears to have gained the most traction with LSI Logic Storage Systems Inc., the only Tier 1 reseller of its software. LSI offers TrueSAN's storage management software for its MetaStor storage array. LSI and EMC representatives declined to comment for this story (see TrueSAN Supports LSI).

Last but not least, next-generation NAS startup Zambeel is another company we've been hearing a lot about lately. But unfortunately the news, if it's true, isn't good.

"The question around the office these days is whether or not we have two weeks or a month's worth of cash left," says a company insider. This source also mentioned that there are guys in white coats with clipboards on site taking inventory, which sounds suspiciously like Chapter 7 bankruptcy proceedings. We were unable to confirm any of this with the Zambeelians; for one thing, the PR contact listed on its Website is no longer with the company.

We do know that Zambeel's chief operating officer, Karl Schubert, resigned last month following a round of layoffs at the Fremont, Calif., startup (see Zambeel COO Skedaddles).Founded in September 1999, Zambeel has received $65 million to date from Kleiner Perkins Caufield & Byers, New Enterprise Associates (NEA), Integral Capital Partners, Amerindo Investment Advisors Inc., and other investors.

Life in the startup lane isn't easy, says Dan Tanner, director of storage research at Aberdeen Group. "Any startup must gain its first customer and make a name for itself... That is difficult when the startup's offering is aimed at mission- or enterprise-critical niches."

Adds Tanner, "Chief information officers bet their jobs or their careers on the choices they make and can be expected to be very conservative and risk averse. And operating in tough economic times like the present makes the hill even steeper for startup vendors."

All in all, it's a dismal time for those startups that haven't got the customer traction and are running out of cash. And now it seems their VCs are unwilling to step in to bolster their funds -- which is never a good sign.

Jo Maitland, Senior Editor, Byte and Switch