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Terracotta Inc. has raised $10 million in a Series C round led by DAG Ventures, as the maker of application infrastructure software refines its technology for helping retail and media customers reduce costs by putting Web tools on low-cost clustered computers. The deal includes previous investors Accel Partners of Palo Alto, Calif., Benchmark Capital of Menlo Park, Calif. and New York-based Goldman, Sachs & Co., and is expected to take the company to profitability within a year. The new money will support expansion of the company's product from the Java platform to include applications running on Microsoft Corp.'s .Net platform, and will allow Terracotta to advance its innovative open source marketing strategy. Terracotta CEO Amit Pandey said the new investment is an affirmation of a decision he made shortly after joining the company in August 2006 to make the company's products available as open source software, allowing customers to test the technology before engaging the company for customization and support services. Pandey said moving to open source software after initially launching the company's first products in the summer of 2006 has allowed Terracotta to dramatically expand its potential client base. "When I came we had just launched the product, but it was a blank slate on how we were going to market it, and it takes a lot of effort to educate users about new ways of doing things," Pandey said. "Since going open source, we have had 15 to 20 times growth in everything, from downloads to page views, and I think we would have spent $4 million to $5 million more on marketing if we had not gone open source." Pandey said he was attracted to joining the company after having spent a decade at Sunnyvale, Calif.-based storage software maker Network Appliance Inc., adding that Terracotta's products could change the way companies manage Web applications as much as Network Appliance changed the network attached storage market. He also said Goldman Sachs' participation in leading the company's $13.5 million Series B round in late 2005 was an endorsement of Terracotta's technology, given the investment bank's reputation for funding, as well as using, groundbreaking information technology products. Terracotta's products are aimed primarily at retail and media companies facing rapid growth of e-commerce and other transaction-oriented applications. When running on multiple low-cost servers that share data in a distributed "cloud," such applications can become very expensive very quickly, as corporate users maintain database license. "There is a lot of pain around people being held hostage to the database," Pandey said. Insik Rhee, now a venture partner at Accel, was an angel investor and adviser to Terracotta when it was originally incubated at Accel by founder and chief technology officer Ari Zilka. Rhee had been a founder of pioneering Web applications developer Kiva Software of Mountain View, Calif., which was acquired by Netscape Inc. in December 1997 for $180 million, and he has closely followed the industry. Rhee said that the cost of scaling applications made it necessary for IT managers to bring data into applications, in much the way the security software industry was transformed when it became possible to hard-code security protocols and policies within applications. He said Terracotta's approach is analogous in hard-coding data within the applications. "Data needs to live in the cloud, rather than in the database, and Terracotta really has created a new technology, not just a new product," Rhee said. Pandey said the driver for the new funding round was that the company was able to direct potential investors to customers that have been using the product and demonstrating real value in reducing database licensing costs. Terracotta initially met with five potential investors and eventually solicited two term sheets, choosing San Francisco-based DAG at a valuation he termed significantly up from its previous round. DAG partner Nick Pianim said the company's technology is unique in scaling key applications while reducing the need for database licenses, and he said he was attracted by the progress the company demonstrated last year. Pandey said Terracotta projects positive cash flow within the next 12 months, and he does not expect to raise additional private capital. The company did not use an outside adviser in arranging the round, and the company had legal work on the deal from Craig Jacoby of Cooley Godward Kronish LLP in San Francisco.  Deal Video
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