Data storage sector starting to feel pain
By Matt Marshall
Mercury News
Posted on Wed, Oct. 23, 2002
When Armageddon hit Silicon Valley's high-tech economy in late 2000, venture capitalists sought refuge in the ``data storage'' sector.
Big corporations needed help storing and securing the vast amounts of data they compile from managing their business processes, from supply chains and inventory to customer relations. Since about 1997, the venture community pumped an estimated $2 billion into about 165 storage start-ups, 43 of them in Silicon Valley, according to the database of VentureOne, a venture research firm in San Francisco.
The reason we don't hear too much about them is that the bulk of the pain is only now beginning to hit. Many companies got funding recently, and are only now bringing their products to market.
``There's a brutal winnowing process going on,'' said Scott Sandell, a partner at New Enterprise Associates.
For example: Sanrise, a Dublin start-up, folded in June after eating through $203 million from venture backers like Crosspoint and Comdisco.
Fremont's StorageWay sold out in July to Cable & Wireless for a pittance -- $2 million -- after raising $98 million in venture backing.
Remarkably, the storage market is growing, but only in certain sub-sectors. Large companies bought loads of storage capacity in the late 1990s and most don't need any more, analysts say. What the companies need are specialized storage solutions to help them with things like security, backup and better management of their existing storage networks.
One niche, for example, is switching technology. Here, Cisco Systems plans to buy its in-house start-up, Andiamo, to help it compete against the likes of San Jose's Brocade Communications.
In a counterpunch, Brocade is rumored to be negotiating to buy Rhapsody, a Fremont start-up that has intelligent switch technology -- and $62 million in VC backing. Brocade wouldn't comment on the rumor.
But the $1.64 billion market for the relatively hot ``network infrastructure'' portion of storage is growing at little more than 10 percent a year, according to James Opfer, a storage analyst at Gartner. ``That doesn't leave a huge opportunity for new people,'' he said.
Most storage start-ups are left fighting for the scraps. ``The good news, it's a growing market,'' said Magdalena Yesil, a VC at US Venture Partners who invested in MaXXan, a San Jose storage company. ``The bad news, it's over-invested.''
Many start-ups aimed to enter the big leagues, and developed cutting-edge storage platforms that sought to claw away market share from big incumbents like EMC, Hitachi and Sunnyvale's Network Appliance. But this part of the market, storage systems, has been shrinking over the past two years, and could take a while to grow again.
Fremont's 3ParData Systems generated the most hype. Backed by $121 million, it recently sold its ``storage-area network'' platform to five customers, including Mountain View's Veritas and Sacramento's RagingWire. CEO David Scott says he's proud of the progress he's made for this environment: ``We're optimistic,'' he said.
Fremont's Zambeel is another high-profile start-up, backed by Vinod Khosla of Kleiner Perkins Caufield & Byers. Founded in 1999, and funded with $65 million, Zambeel offers a high-end alternative technology, called ``network-attached storage.'' Zambeel launched the product in June, but has only sold to two of 20 companies testing the product. Zambeel will announce its first customer, the Department of Energy, next week.
Some of the recent start-ups, analysts say, could make it. But only a few. Waheed Qureshi, founder of Zambeel, says he still gets calls from VCs who want him to help perform due diligence on storage networking start-ups. ``They're still getting carried away,'' he said.
Contact Matt Marshall at mmarshall@sjmercury.com or (415) 477-2518.
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