Storage Companies Build a Hot Future

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It wasn't that long ago that the founders of Nishan Systems were making the rounds among venture capitalists with the idea of developing a technology to transfer storage block-data across an Internet protocol or Ethernet network.

Their timing couldn't have been worse. The buzz surrounding storage then was consolidation, and Fibre Channel was the protocol of choice, especially for those who wanted to transfer data across long distances. So, when Nishan entrepreneurs went looking for investors to back IP storage, the reception was less than kind.

"At that point, all the venture capitalists thought doing storage on IP was stupid and that no one would do it," says Gary Orenstein, now director of marketing at Nishan.

"I remember a couple of meetings when they looked straight at us and said, 'That is not going to happen.'"

So far, Nishan has proved them wrong. Today, the company represents a new breed of promising companies that have defied convention and carved out a niche for themselves in storage. Along with BlueArc, Cereva Networks, Datacore Software and a few others, Nishan has brought innovation to the storage market, which is now considered one of the few bright spots in the otherwise dismal technology economy.

Though relatively young, these companies have been in existence for more than two years, weathering growing pains and collectively raising some $400 million in venture capital and strategic partner money.

Their success has attracted others. Researcher International Data Corp. (IDC) has found storage start-ups sprouting up almost on a weekly basis. To date, IDC analyst Robert Gray has tracked roughly 150 new start-ups in the past 12 months, many of which are in the beginning stages and don't have products on the market yet. Just last December, Maranti Networks, Storigen Systems and Z-force Communications collectively brought in $56 million in second-round funding.

But it's hard to determine how many will become independent players or be swallowed up by larger vendors looking to bolster their storage practices. Venture capitalists are already beginning to wonder if there has been too much money sunk into storage start-ups. Investors say some of the 150 newcomers will have difficulty in procuring more money, especially since storage revenues were down 40 percent in the United States and 18 percent worldwide in 2001. At least two of Gray's clients were recently unable to close a new round of funding, for example.

"We will have a storage bubble," Gray says. "It just won't be visible because the vast majority are small and they will just quietly go away."

Venture capitalists agree. Consider Matrix Partners of Waltham, Mass., for example. In the past six months, partner David Skok has heard pitches from 15 start-ups seeking money to turn their storage ideas into tangible technologies. Of those, only AppIQ was given funding. It plans to make its debut in the third quarter 2002 with a product that manages storage via the application so problems affecting performance can be identified proactively.

"With the economy the way it is right now, we are being very, very careful," Skok says. "Out of the 150 companies, you are going to see one market leader, one second-place and one third-place player in each space. All others will get consolidated."

Undaunted, storage companies, including Nishan Systems, Datacore Software and BlueArc, continue to hone their businesses and tout their advantages. Furthermore, Nishan and Datacore have built partnerships and alliances with major vendors including IBM, Dell and Hewlett-Packard in an attempt to integrate their technologies into solutions. They are also beginning to make headway with new channel strategies, as well. As Datacore CEO and president George Teixeira puts it: "It's no longer 'small Data- core.' It's 'Datacore and its big buddies.'"

Datacore: Building Ubiquity

Nishan: Building a Base

BlueArc: Going It Alone

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