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Venture capitalist talks storage, economy and the cloud

VC says IBM Tivoli and Hewlett-Packard OpenView may come under attack, cloud computing is for real, and the storage industry should expect fewer but larger funding rounds going forward.

The type of technology that shows up in future generations of storage products greatly depends on which startups get funding to develop those products. So recently got together with Justin Perreault, general partner at Waltham, Mass.-based Commonwealth Capital Ventures, to get his take on what the storage landscape will look like in a few years. What technologies are most likely to get funding this year?

Perreault: Good question. [laughs] I might rephrase that as 'Are any technologies likely…?' I'm joking. There's a lot of interest in virtualization, I think, that's ongoing. I think that will be maintained because of its strong ROI and economic proposition. There's a lot of focus around making desktop virtualization real, managing a virtualized environment, lifecycle provisioning of virtualization resources, managing utilization, capacity and efficiency -- all the things the HP OpenViews and [IBM] Tivolis provide for nonvirtualized environments. There are a lot of startups out there chasing various aspects of that. I think there'll be a lot of activity in those areas and some will emerge as winners. Hewlett-Packard (HP) Co. and IBM Corp. would tell you OpenView and Tivoli are meant for use in virtual environments, too. What's the vulnerability newer companies are going after?

Perreault: Both those products tend to be legacy products that are sort of heavyweight and difficult to implement. With the startups we talk to and the beta users or customers they have that we talk to, there seems to be plenty of opportunity to provide things that may be on HP's or IBM's roadmap but don't exist yet. It's the classic story of faster moving, nimbler startups that can get innovative product out well ahead of larger incumbents. I think there's some of that going on right now in that area. What about cloud computing – is it real or just hype? What about cloud storage?

Perreault: I think it's real but early. Cloud storage is absolutely for real. There have been a few startups over the years – LiveVault [now owned by Iron Mountain Inc.] was one and, more recently, Carbonite [Inc.]. The notion of resources in the cloud is very appealing for the consumer markets today and for a lot of SMBs [small- and medium-sized businesses]. It has the potential to migrate up the food chain to bigger and bigger enterprises, and more mission-critical apps.

Right now we're looking at a number of business plans and startups that are looking to provide elements of the infrastructure stack in cloud computing. That ranges from database companies that posit that there's a need for different or new database capabilities in the cloud, or things that are more middleware and system management oriented.

The database plans arguably would be storage oriented, although not storage subsystems. We've looked at both online backup and storage, and things like email archiving and storage that are cloud-based business models. Any areas where storage software would be key aside from the cloud?

Perreault: Not one we've invested in recently. I think there are companies like Netezza [Corp.] that have been very successful in the online analytical data warehousing space. They tend to fall in the category of responding to the fact that as more and more data gets created, whether it's in the financial sector or Internet user traffic behavior, the data sets are getting extraordinarily large and just keep growing exponentially. That is a trend that seems to be continuing without end. There are lots of opportunities for companies that can manipulate extremely large data sets efficiently and help people analyze them well. Do you think more startups will go under this year because of a lack of funding?

Perreault: Yes. We tend to think of startups in a few stages. There are the really early stage companies that are just getting going. I think as long as they have sound ideas and good teams and good VCs [venture capitals] backing them, those will be OK because they're generally not burning a lot of cash and not relying on a revenue ramp to sustain the business. Companies that are much further along and have some real scale and critical mass will have enough substance to weather the storm. The ones that are sort of the 'tweener companies' where they've launched a product and built a sales force, but they're trying to introduce a new product to market at a time when people aren't buying—they'll probably have the roughest sledding.

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Storage industry braces for 2009 spending slowdown Copan Systems picked up $18.5 million and Ocarina Networks received $20 million in recent rounds. Do you see a trend where there will be fewer funding rounds for larger amounts?

Perreault: There is something to that. I think you will see a trend toward venture capital syndicates deciding who their winners are and putting a lot of wood behind the arrow to make sure they succeed. I wouldn't be surprised to see a pattern of fewer A round startups but some very high-quality ones funded, and then some real commitments in terms of later stage investments to companies that are further along to ensure they can make progress until there is an IPO window when the economy returns. How do you see the economy playing out?

Perreault: My guess is the root cause of this downturn is one that has no quick solution no matter what anyone does, including all the government stimulus stuff. All the economic growth we've had over the last six or seven years, if you back out the component of that due to increasing leverage—in other words, consumer spending driven by increases in home mortgages, home equity loans and credit card debt—GDP would've been down for three of the last six years, and up only 1% or so for the rest. If we're now in a regime where people decide we need to borrow less and save more, and pay down the debt they already have -- which I think is happening at the consumer level -- then that's a recipe for very sluggish economic growth for several years. I think that eventually bleeds back into corporate results and affects corporate appetite for capital spending, which includes IT spending.

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