Skytap, With New VC Bucks in Tow, Takes on Big Boys in the Cloud

A couple of weeks ago, we reported on Seattle startup Skytap’s $7 million funding round. It’s one of the Northwest’s bigger venture deals of the year, and the company is a pretty interesting play in the cloud computing space, so I figured it was worth a closer look. Especially given all the hubbub about cloud strategies these days, from the likes of big players such as Amazon, Google, EMC, and Microsoft—all of whom should probably pay attention to this little startup in Pioneer Square which has just over 20 employees.

Skytap was co-founded by University of Washington computer science professors Brian Bershad and Hank Levy in 2006. (Back then, it was called Illumita.) The company got seed funding from Madrona Venture Group, WRF Capital, and Bezos Expeditions, followed by a $6 million Series A round from the founding investors plus Ignition Partners in 2007. The original concept was a way to deliver “virtual machines” over the Web. It was a new idea then, but the market has already matured in just three years, and now everyone and their brother is offering some sort of cloud-computing application that lets you access processing power or data storage over the Internet. So, like most successful companies, Skytap has had to adapt to keep its edge.

In fact, the company says the original patent filed by the UW professors only covers about 15 to 20 percent of what Skytap does now. In the last four months, the company has filed a much broader patent that covers 50 to 60 percent of its current offering. I recently talked with chief executive Scott Roza and director of product management, Ian Knox, to hear about Skytap’s latest technology and the significance of its new funding round, which came from Madrona, Ignition, and WRF Capital.

“It’s a pretty challenging market to raise money in. The venture community is looking at the impact of the economy on companies in their portfolios,” says Roza, a former vice president at HP/Opsware and iConclude who joined Skytap about a year ago. “Most of the venture guys, if they were going to invest in 20 companies, they’ll likely invest in 15. Most are doing fewer new deals, preserving capital for companies in their portfolios.”

Roza’s original connection to the firm is through iConclude. That’s where he got to know Skytap board member Sunny Gupta, iConclude’s co-founder and CEO, and Matt McIlwain of Madrona, who invested. (The company was bought by Opsware for $65 million in 2007.) As for his current investors Ignition, Madrona, and WRF Capital, Roza adds, “They’re extremely committed to Skytap, and they’re excited.”

That’s because Skytap’s latest technology lets companies manage virtual machines that take care of data storage, processing, and networking for complex tasks like software development, quality assurance, training, and operations testing. It can sound a bit abstract, but the bottom line is the company tries to do this in a way that saves its customers huge amounts of time and money in their IT operations—and can be used by business people, not just technical experts.

One of Skytap’s customers is Buildingi (pronounced “Building-eye”), a Bellevue, WA-based firm that helps companies like Microsoft and Safeco manage their real estate portfolios. “They came to us, and they use Skytap for all their test environments,” says Knox. That means when Buildingi publishes a new version of a software prototype and is looking to fix the bugs, it uses Skytap to let customers do things like take a snapshot of the software running, send it to the code’s developer, and have them diagnose the problem. Those sorts of tasks are expensive and time-consuming if you’re not able to “spin up” a virtual data center and run software applications collaboratively.

And that seems to be Skytap’s advantage over other cloud offerings from companies like Amazon and Google, in which either you can’t spin up a whole data center with the required networking, or it’s more of a proprietary platform that requires a specific flavor of programming. There are a lot of technical details in these comparisons, but my take is that Skytap is positioning itself to be a simple, efficient virtualization service for a certain class of medium-sized companies that aren’t finding what they want from the big boys.

“One of the key attributes of Skytap is that they give you cloud computing with your existing apps, whereas the others require you to develop specially for their restricted model of computing,” says Ignition partner Brad Silverberg, in an e-mail. “It means you can go cloud computing right now.”

Looking at the big picture of cloud computing, Knox says, “This is a fundamental change in the way computing is delivered, technologically and economically.” There is an analogy here to Web services, he says, which got a lot of hype back in 1999, but took 10 years to become common. In the meantime, Skytap seems to be seizing the moment. “A downturn like this is an opportunity,” Roza says. “By the time folks are less paranoid, by the time the big guys come in, we’ll be close to escape velocity.”

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