Features - Storage Innovations:

CEREVA NETWORKS SHUTS DOWN - 140 EMPLOYEES LAID OFF

As reported by Katherine Goncharoff. The once high-flying data storage sector witnessed the collapse of yet another startup. Cereva Networks Inc., with little chance its star-studded cast of venture capitalists will recoup a dime of their $ 137 million investment. A victim of swiftly shrinking corporate IT budgets and a sharp drop in demand for the startup's large-scale enterprise storage systems, the Marlborough, MA.-based company last week abruptly shut down and laid off 140 employees.

Sources close to the deal said that it's possible that the company's VC investors will lose their entire $137 million equity and debt investments and also stand a chance of bearing the cost of approximately $10 million in liabilities, according to sources familiar with the Cereva's finances. Those investors include some of the industry's most successful VC firms, including Matrix Partners, a Waltham, MA.-based VC firm that led Cereva's first round of funding along with North Bridge Venture Partners, also of Waltham, and Oak Investment Partners of Westport, CT.

Of the three, Matrix is perhaps the most prominent in the VC community. The firm has boasted an average annual return of about 100% since 1990 from earlystage investments in infrastructure and communications firms.

Among Matrix Partners big hits were: Sonus Networks Inc., of Westford, MA., which at one point had a market capitalization of $6 billion; Sycamore Networks Inc., of Chelmsford, MA., which turned $9 million of seed-stage investment from Matrix into $3.3 billion of public stock; and Acton, MA.- based ArrowPoint Communications Inc., which received $11 million in VC funding from the fund and was then sold to Cisco Systems Inc., for about $5.7 billion in June 2000.

Other disappointed Cereva investors are Sumitomo Corp., of Tokyo; Intel Corp., of Santa Clara, CA.; Global Crossing Ventures of Sunnyvale, CA.; Goldman, Sachs & Co.; Worldview Technology Partners of Palo Alto, CA.; and Comdisco Ventures of Rosemont, IL.

Cereva spokeswoman Lucia Graziano said the company's chief executive, former Lucent Technologies Inc., executive Mahesh Ganmukhi, and a skeleton staff remain at the startup while the firm attempts a sale of its intellectual property. The company has decided to quickly wind down operations in lieu of a more costly bankruptcy filing, she said.

"There are no liabilities to my knowledge, and it is unclear at this stage whether or not the VCs will be getting any of their money back," Graziano said. But sources close to the company said the firm has approximately $10 million in liabilities and in excess of $1 million in assets.

The O'Connor Group Inc., of Boston, a restructuring firm, has been retained to manage the firm's wind down, and the company is talking to liquidators and auctioneers in the hope of signing one up. Paul Ferri, the Matrix partner on Cereva's board, and North Bridge's Ed Anderson, also on the board, were not available for comment.

Analysts who cover the enterprise storage sector said Cereva's shutdown was not surprising, though it highlights once again that the heavily funded sector, which saw 60 startups draws close to $2 billion in venture capital in the past few years, is in serious trouble.

"This is clearly an overfunded space that has been funded aggressively and rather stupidly over the past several years," said Steve Duplessie, a senior analyst with the Enterprise Storage Group in Milford, MA. He said Cereva was founded during a period when, "even a monkey with a ball could get $100 million in funding from VCs to start a storage company."

Cereva's collapse comes on the heels of Sanrise Inc's., Chapter 11 bankruptcy filing last week. The Dublin, CA.-based firm raised $115 million in venture capital funding from firms such as Woodside, CA.-based Crosspoint Venture Partners, ACON Venture Partners, of Fort Worth, a TX., Pacific Group affiliate, and Morgan Stanley Dean Witter Equity Funding, a VC arm of the New York investment bank.

Jamie Gruener, a senior analyst with the Yankee Group in Boston, said Cereva was unable to produce a product for commercial sale that could keep customers. As of last week, the firm had only introduced a beta product for review.

"The whole storage sector today has become far more modular, and they were looking to provide a very large, carrier class of storage that increasingly, companies are simply not looking for," he said. Cererva was one of several startups specifically aiming to build storage systems that could handle extremely large quantities of data measured in pedabytes - bytes on the order of quadrillions, or computer storage space with the ability to hold the same amount of information contained in 1,000 university libraries.

Four-year-old Cereva was originally founded as an infrastructure company but switched its focus early on to enterprise storage. Nonetheless, the startup failed to bring its storage disk array product to market.

In May 2001, the company named board member Ganmukhi as its new CEO and at one point unsuccessfully sought a buyer. Those acquisition feelers came just months after it raised its most recent venture capital round of $51 million.

Its closest competitors include 3PARdata of Fremont, CA., which says it will begin shipping its product later this year; Zambeel, also of Fremont, that began shipping its first product this week; and YottaYotta, of Seattle. The three have raised upward of $300 million from venture investors including such Silicon Valley blue-chip VCs as Kleiner Perkins Caufield & Byers, the Mayfield Fund, New Enterprise Associates, Intel Capital and TechnoCap Inc., of Montreal.

All of them aimed to wrest control from industry leader EMC Corp., of Hopkinton, MA., and have succeeded in doing so to some extent by offering a slew of new hardware and software amid expensive marketing campaigns and aggressive price cutting, according to Hopkinton-based research firm International Data Corp.

Other giants in the storage sector include IBM Corp. of Armonk, N.Y., and Network Appliance Inc., of Sunnyvale, CA.