Job Axe Swings at Storage Startups

Just when you thought things couldnt get any worse, the pink slip hits your desk.

Two prominent startups in the Silicon Valley area underwent layoffs this week. Storage service provider Scale Eight Inc. and iSCSI router manufacturer, SAN Valley Systems Inc. each let go approximately 15 percent of their workforce to ease financial woes.

Scale Eight is down to 67 employees, with eleven cut from engineering and five from administrative and sales positions. SAN Valley is less precise about its headcount, but says it will now fluctuate around the 70s.

Of the two companies, SAN Valley appears to have come through its workforce reduction in one piece and is back on track. Its founder and CEO Sandy Helton has been replaced by Bob Coackley, former CEO of Inrange Technologies Corp. (Nasdaq: INRG). "In this economically uncertain time, we are making prudent cuts and have brought in a new CEO with a strong sales and marketing focus," said Niraj Jain, VP of marketing and business development. Helton will become executive VP and CTO.

Scale Eight appears to have deeper problems to solve. The company’s CEO Dick Watts has resigned, and its primary co-location partner, Exodus Communications Inc. (Nasdaq: EXDS), has just filed for Chapter 11 bankruptcy protection (see Exodus: What's Next?). Scale Eight hosts its global storage service from Exodus data centers in Tokyo, London, Virginia, and San Francisco."It is a terrible time to be in IT and an equally terrible time to be in storage," said a spokesperson for Scale Eight. "But, we are happy Exodus has declared bankruptcy, as at least this means they will stay in business longer." He said the company hosts its services from Exodus’s "most densely populated" data centers, which should hold out -- although Scale Eight is taking no chances and is currently seeking alternative partners.

Harsh Kumar, an analyst with Morgan Keegan & Company Inc., said, "Many startups in this sector that initially received loads of funding have seen that dry up, and now need to get very effective, very quickly." He cites Cereva Networks Inc. as a case in point. "I’d hate to see the terms of their latest round." (see Cereva Skids to a Halt and Cereva's Back on Track).

In the case of Scale Eight, the problems may not be as much financial as strategic. Although the company recently raised a third round of funding (see Scale Eight Set to Close $30M), experts say the longterm prospects of its business model could be problematic.

SSPs around the globe have been scrambling to reposition themselves as software firms as they discover that it is too capital-intensive to deploy storage resources in data centers across nations. "They have learned the hard way that the build-it-and-they-will-come mentality is bullshit," says one Wall Street analyst, who requested anonymity (see SSPs Switch to Selling Software and StorageNetworks: Big Layoff).

Scale Eight is adamant that it does not fall into this category. "We are not one of those SSPs abandoning one business model in favor of another," says a company spokesperson.Former employees beg to differ. "Ask them about Project Atlas," said one ex-Scale Eighter, in a recent conversation with Byte and Switch. "It is software they plan to start selling in six months."

Scale Eight was reluctant to comment on unannounced products, but admitted, "We may look for alternative revenue streams but we are not shedding our global services business."

Time will tell. Meanwhile, the company has begun the search for a new CEO.

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com