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On the cusp of launching its first commercial products, VirtenSys Ltd. raised $12 million from previous investors to extend virtualization technology into the realm of input/output functions to reduce hardware costs and power usage in clustered computing. U.K. venture firms Celtic House Venture Partners, Scottish Equity Partners and GIMV opted to keep the round in-house as the Manchester, England-based company builds a U.S. headquarters in Beaverton, Ore., to work closely with U.S. integration partners, before seeking a larger round with U.S. investors next year. The new round came at a pre-money valuation of about $24 million, up from the company's $12 million round of August 2006, but investors expect a better value inflection point after generating some revenue traction later this year. VirtenSys completed proprietary chip technology and has a working demonstration version of its product in testing with customers since last year. But CEO Ahmet Houssein said the company is still working with partners on developing features for the system level product before launching commercial sales, which are expected to commence in the second quarter. VirtenSys was spun out of U.K.-based Xyratex Ltd. in 2006 after the storage systems company had spent about $20 million on chip development for the telecommunications market. But investors backing the spinout recognized the technology was directly applicable to virtualizing input/output functions to bring high-performance computing capabilities to clustered systems of commodity servers. VirtenSys set out to replace expensive I/O cards that enable individual server connectivity on the Ethernet standard or on specialized platforms including InfiniBand, fibre channel or high-speed Ethernet, with systems level technology that controls connectivity within a virtual "cloud." Houssein said he was attracted to joining the company as CEO last year after seeing the chip technology and the opportunity to build a multifunction systems product to reduce connectivity costs. In establishing a U.S. headquarters housing systems solutions development, the company has worked closely with potential server and appliance customers, and on integrating its products with virtual server software from Palo Alto, Calif.-based VMware Inc., Redmond, Wash.-based Microsoft Corp. and the open source XenSource platform. Houssein was an early participant in the consortium that developed the high-performance InfiniBand connectivity standard while at Intel Corp., and he said he sees the same potential in connectivity virtualization that has been achieved in server and applications technology. "My relationship with I/O goes back many years, and when I first looked at what VirtenSys was doing I saw they were in the right place," Houssein said. "What attracted me was particularly that the space of virtualizing I/O in data centers is just coming in as one of the last areas of virtualization." Tomas Valis, a general partner with Celtic House, said the chip development team at VirtenSys has been together for more than a decade, first at U.K.-based Imperial Computers Ltd., then at U.K.-based Power X, which Celtic House also backed before it was sold to Xyratex. He said the market for expensive high-speed telecommunications connectivity products dried up with the industry decline early in the decade, but that the technology ideal for creating a systems level virtualization product was key. "The thesis was to take technology from the mainframe world in high-performance computing and apply it to a broader market in the data center," Valis said. "They took ideas from high-performance computing and focused them much more on the needs of the enterprise customer." Valis said bringing in a U.S. investor at some point is likely, but that the syndicate realized it would not get an appropriate valuation without product revenues, and that insiders had seen enough progress to want to increase their own stakes. Stuart Paterson, a partner with Scottish Equity, said the backers briefly considered marketing the round to new investors, but did not spend any time fundraising. "We are all fairly large funds and the A round was pretty small for us all, so we were keen to put a little more to use," Paterson said. "There will be another round in 2009 when there are revenues, and we expect a good valuation at that time." VirtenSys did not use an outside adviser in closing the investment round, and had legal representation from Eversheds LLP in London. Investors were represented by John Harding-Edgar of McClay Murray & Spens LLP in London.  Deal Video
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