GrandBanks Beams Toronto Virtualization Startup to Beantown; Its Fourth Canadian Transplant Since 2001

11/7/07Follow @wroush

Virtualization is all about breaking down artificial boundaries. Typically, the boundaries involved are those between machines such as business servers—and Xkoto, a virtualization startup that announced a $7.5 million Series B funding round yesterday, fits that mold perfectly. It’s one of many companies these days looking at corporate data centers and trying to figure out how to spread computing tasks (in this case, running database programs) across machine boundaries as efficiently as possible.

But Xkoto is also breaking another artificial boundary: the one between the United States and Canada.

Along with its financing, the startup announced that it’s moving its headquarters from Toronto to Boston and getting a new American CEO, former Ximian chief executive David Patrick. It’s all part of a transition engineered by Boston-based GrandBanks Capital, leader of the funding round. Patrick says the money and the move will help the company more easily recruit sales and marketing talent and become better known in the U.S. market.

GrandBanks is becoming an old hand at this sort of thing: Xkoto is the fourth Canadian company it has transplanted to Boston since it began making software investments north of the border in 2001. It’s not an attempt to drain Canada’s software brains to Massachusetts—in fact, all of the company’s engineering and development staff will stay in Toronto. Rather, it’s about giving Canadian entrepreneurs access to U.S. capital—or, to put it the other way around, giving U.S. investors the opportunity to back innovative Canadian companies.

“For investors, there is a very onerous tax code in Canada that, at exit, would try to repatriate any profits from investments made there,” explains Tim Wright, the GrandBanks partner who engineered the Xkoto deal. “So GrandBanks sets up Delaware corporations that become the parents of these Canadian subsidiaries, so that our limited partners can get access to investments in Canada. It’s expensive to set up—the Xkoto deal cost us close to $300,000 in legal fees—but it gives us access to fantastic resources, including well-educated, cheaper talent.”

It’s very much a two-way street. The Canadian companies in which GrandBanks has invested—including, before Xkoto, FirstCoverage of Toronto and Colubris Networks and Coradiant, both started in Montreal—were all at the stage where they were looking to expand internationally and sell their products or services in the U.S. “We can provide them with some of the underlying expertise that’s missing, in terms of executive management teams or finding successive funding from U.S. venture capital firms, and help them to penetrate a market that’s difficult to get into,” says Wright.

Getting into the U.S. market is especially key for Xkoto, since there are so many more companies here that use enterprise database software and might benefit from the company’s particular brand of virtualization. If you’ve been reading this blog, you know that there’s been a lot of hubbub lately about virtualization—talk that is both fueling and being fueled by the stellar stock performance of EMC (NYSE: EMC) subsidiary VMware (NYSE: VMW). But VMware’s software is for virtualizing operating systems and the applications that run on them, not the data that these applications actually operate upon.

In an ideal world, it would also be possible to virtualize databases, so that, for example, multiple copies of a database could be active at the same time, across one or many machines. As it turns out, that’s exactly what Xkoto’s software does. IBM’s DB2 database system—which, for now, is the only system the two-year-old company’s software works with—has the ability to run one “active” copy of a database and one “passive” copy, which can be brought up as a backup in case the active copy fails or is undergoing maintenance. But that’s a tricky, time-consuming process, with some downtime in between.

According to Patrick, Xkoto’s “Gridscale” software can run multiple active copies of a DB2 database on a network, updating all of them continuously. “That gives you high availability for disaster recovery or maintenance,” says Patrick, “but it also allows you to scale up and improve performance,” since the active copies spread themselves out evenly and automatically whenever new hardware resources are added to a network.

Gridscale will run alongside VMware on systems where operating systems and applications are also being virtualized, Patrick says, and the company is working on versions of the program that will work with Microsoft’s SQL Server software.

But while virtualization is hot, Xkoto couldn’t sit in Toronto and wait for business to come to it, Patrick says. “You’ve got to go out and define your market. And to position itself as a market leader, Xkoto needed access to venture capital and more presence in the United States. It’s a win-win situation. Both the investors and the employees will see us accelerating at a much more rapid pace, without the loss of anything they were doing in Canada.”

Wade Roush is Chief Correspondent and Editor At Large at Xconomy. You can subscribe to his Google Group or e-mail him at wroush@xconomy.com. Follow @wroush

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