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Cloud firm garners $30M from Netflix backers

By   /   Friday, April 20th, 2012  /   Comments Off on Cloud firm garners $30M from Netflix backers

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Eucalyptus Systems has raised $30 million in fresh venture capital from the same firm that funded Netflix and Twitter, bringing the Goleta-based cloud computing software company’s total capital raised to date to $55.5 million.

Eucalyptus was founded in 2009 by a team of computer scientists led by UC Santa Barbara professor Rich Wolski. It makes open-source software for building private computing clouds that can interact with public clouds such as those provided by Amazon Web Services, or AWS. So-called hybrid clouds are useful for companies who need cloud computing to crunch large amounts of data but need some of that data kept behind their own walls for security reasons.

Menlo Park-based Institutional Venture Partners led the funding round, planting Steve Harrick on the Eucalyptus board of directors. Existing investors Benchmark Capital, BV Capital and New Enterprise Associates also joined in the funding round.

The deal comes shortly after Eucalyptus inked an agreement with Amazon to ensure continued compatibility with AWS. The deal is essentially a seal of approval from the undisputed largest cloud computing provider on the market. “It’s a huge, huge win for us,” said Eucalyptus CEO Marten Mickos. “There’s no other such deal — it’s completely unique in the industry.”

New capital

Mickos, who encountered Institutional Venture Partners back when he was CEO of database firm MySQL, told the Business Times that the funding will go toward bolstering the current Eucalyptus headcount of 80. Eucalyptus opened an office in China last year and has seen an explosion of use of its software, Mickos said. “We have plenty of cash remaining from our previous round, but at the same time, we like to play for the long term and prepare for everything,” Mickos said. “For us to respond to that customer demand, especially in India and China and Europe, we need more people. Our customers are saying to us, ‘We are now deploying Eucalyptus around the world in our organization — are you ready to support us?’”

Eucalyptus got its start as a research project to tie together several private data centers at universities and the public AWS cloud to crunch massive amounts of weather data. By 2009, Wolski’s team decided to commercialize the product as open-source, meaning that a basic version is free, but a business-class version includes support services and consulting services from the team that designed the software. It quickly gathered investor interest and brought aboard Mickos, who led MySQL, a widely popular database platform, until it was acquired by Sun Microsystems. The most recent deal was “oversubscribed,” which means that investors wanted to pour in more money than the company was willing to take.

“It’s not unusual for companies to have their pick of term sheets, even in this day and time — the key is the strong value proposition and the team,” said David Lafitte, an attorney with Stradling Yocca Carlson & Rauth who has closed many financing deals.

The Eucalyptus money is a Series C round. Institutional Venture Partners is what is known as a late-stage venture capital firm. That means that it puts money into the last, or near to last, round before its investment companies go public or are acquired. However, the timeline can stretch. The fund invested in Twitter’s Series C round in 2009, and that company has yet to see a liquidity event. However, Eucalyptus is significantly different because it already has a paying customer base of high-profile clients. The company’s current users include InterContinental Hotels Group and Raytheon and government customers such as NASA and the U.S. Department of Defense.

Tom Hopkins, a attorney with Sheppard Mullin Richter & Hampton who has worked on venture deals, said the recent interest in a Facebook IPO and other high-profile deals might be spurring big investors to pour money into promising companies. “It’s a circle. If the capital markets are hot, and people are seeing good exits, that creates a little bit of a frenzy down stream,” he said.

Eye on the ball

There’s no frenzy, however, at Eucalyptus headquarters. “You can easily start believing your own PR too much and get sloppy. Internally, the first message was, don’t think we have any more money than we had before,” Mickos said.

The hybrid cloud market is rapidly evolving, he said. One of the key ways that Eucalypts has distinguished itself from the competition is by targeting businesses and focusing on the stability and security of its clouds. That is essential to the “open-core” business model. Eucalyptus gives away its basic code for free, but then sells an enterprise version that includes support services and the option of consulting with the original authors of the software.

The idea is that businesses can try Eucalyptus at no cost, and when the customer wants to deploy it in a mission-critical application they can buy support.

The Amazon partnership also helps, because the Seattle company was the first large cloud computing provider and has retained that momentum. Eucalyptus chose to integrate its software with Amazon back in 2007, when it was still a non-commercial research product, and didn’t know that by 2012 Amazon would reign supreme. “They saw something five years earlier than most people. You make those bets, and we never hear of the companies that made the wrong bet,” Mickos said. “That was a controversial one.”

While Mickos and his team are ardent competitors, they also recognize that hybrid cloud computing is far from the mainstream — it is hot only among companies that are “addicted to computing — I mean that in a positive sense,” Mickos said. There are four other open-source competitors, several of which have chosen to focus on government entities or service providers, rather than the enterprise IT market.

“Although everyone would like to see a dramatic competition between cloud providers, it could be that we are growing in different directions like flowers growing in different directions. They don’t really kill each other. They all find some sunshine and grow and prosper,” Mickos said.

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