Connectivity virtualization developer NextIO Inc. announced Friday an $18.8 million third round as the five-year-old company prepares to launch its first products to enable distributed computing systems to connect and communicate using any of a variety of technology standards.

Crescendo Ventures and Adams Capital Management, both of Palo Alto, Calif., led the deal, which included previous investors JK&B Capital of Chicago, the VentureTech Alliance arm of Taiwan Semiconductor Manufacturing Corp., and Round Rock, Texas-based Dell Inc., as well as two new strategic investors. The new funding brings total equity investment in Austin-based NextIO to about $40 million and will allow the company to launch its first commercial products with original equipment manufacturers (OEM) partners in the second quarter.

NextIO co-founder and CEO K.C. Murphy said the company made its first switch products available to customers in late 2007 but will launch its primary appliance product in April, in conjunction with new products introduced by OEM partners. The products are aimed at bringing the same advantages of virtualization to connectivity technology that developers including VMWare Inc., Microsoft Corp. and the open source Xensource platform have brought to the server market.

NextIO co-founder and chief technical officer Chris Pettey said the company was formed in 2003 for developing proprietary chips to help blade computing systems developers solve problems relating to different connectivity formats including differing Ethernet standards, the FibreChannel standard used in many storage systems, and the high-performance computing standard InfiniBand. Pettey had been a founder of Austin-based Banderacom Inc., which was an early leader in InfiniBand when companies such as Hewlett-Packard Co., IBM Corp. and Intel Corp. were betting on it to replace Ethernet as the dominant connectivity standard.

But as the market developed, and the concept of virtualizing server functions on distributed machines grew, NextIO saw an opportunity for developing a systems level product that would allow different types of computer systems to run multiple input/output (I/O) standards without requiring specialized switches on each server.

"The fundamental value proposition has stayed the same, but the market has gotten a great deal of validation with the attention to server virtualization," Pettey said. "We started out building the silicon, but as we talked to OEMs we found they wanted an entire solution and shifted to system development."

NextIO's product virtualizes I/O functions to bring high-performance computing capabilities to clustered systems of commodity servers. The products enable individual server connectivity using any of the several available connectivity standards with systems level technology that controls connectivity within a virtual "cloud."

Murphy said after the company shifted to systems products last year, it began talking to potential outside investors but found the fundraising climate difficult for a pre-revenue company. By the time NextIO was able to demonstrate early orders, near the end of last year, it had drawn interest from strategic investors, and insiders opted to close an internal round to avoid dilution.

Murphy said the decision was dictated by the round size, and while he acknowledged that the valuation was down from NextIO's $10 million Series B round of January 2005, he said it included a restructuring for employees and existing investors.

Crescendo general partner Wayne Cantwell, whose firm led NextIO's B round, said the demand for virtualization will continue to grow, and he called NextIO a pioneer in the field of creating flexible connectivity technologies.
Murphy said the new money will enable the company to build a sales and marketing infrastructure and launch new products. It should be more than sufficient to carry the company through this year, he added, after which NextIO will weigh costs of additional fundraising.

"This takes us through 2008 without any trouble, and if revenue is as we predict, we may never raise another private round," Murphy said.

NextIO used no placement agent for the round, and received legal counsel from Christopher Kaufman of Latham & Watkins LLP in Menlo Park, Calif. -- Clifford Carlsen