The Northwest deal flow in the past week tended toward small partnerships and acquisitions. But there was still some significant activity in software, Internet, and entertainment.

—As ghostbuster Bill Murray once said, “Dogs and cats living together…mass hysteria!” Seattle-based Pet Holdings, operators of I Can Has Cheezburger (Lolcats) and other humor websites, formed an advertising partnership with San Francisco-based social network Dogster. Dogster will sell ads for the Cheezburger network in exchange for the greater traffic on Pet Holdings’ popular sites (which will hit 1 billion page views this week). Details of the revenue split were not given.

—The Washington Technology Industry Association (WTIA) joined forces with advocacy organization TechAmerica in Washington state, thereby broadening its membership to include more companies in hardware, electronics, and devices. WTIA has now become TechAmerica’s exclusive management and marketing partner in the state.

—Seattle-based Appature is getting close to securing its first round of venture funding. No deal has closed yet, but the bootstrapped and profitable healthcare marketing startup has generated a lot of interest in the VC community. Appature was founded in early 2007 and develops software that helps companies in healthcare, pharmaceuticals, and medical devices understand their customers better and do more effective marketing.

—Kirkland, WA-based Digeo, the home entertainment company backed by Paul Allen, was bought by Arris, a Georgia-based broadband communications firm, for $20 million in cash. Arris will acquire Digeo’s high-definition digital video recorder, called Moxi, along with about 75 Digeo employees and their expertise in video networking and multimedia services. About 10 Digeo staff members will lose their jobs in the transition, however.

—Seattle-based Maveron and Boston-based Spark Capital co-led an $8 million Series A investment in Altius Education, a San Francisco company deveoping online higher education programs through partnerships with nonprofit universities. The Noah Fund also participated in the funding. Maveron was founded in 1998 by Howard Schultz and Dan Levitan, and focuses on investments in consumer and tech companies.

—Microsoft (NASDAQ: MSFT) acquired the technology assets of Interactive Supercomputing (ISC), a parallel computing software firm in Waltham, MA, as Ryan reported. Financial terms of the deal weren’t given. ISC’s chief executive, Bill Blake, and the firm’s technical experts are moving into Microsoft’s New England Research & Development Center in Cambridge, MA.

—This was not a new deal, but I took a closer look at Bellevue, WA-based Ignition Partners’ investments in cloud computing and virtualization. The VC firm’s biggest win to date is XenSource, the Palo Alto, CA-based virtualization company that was bought by Citrix (NASDAQ: CTXS) for $500 million in 2007. Three other Ignition investments in the space—Skytap, InstallFree, and Xeround—are still in pretty early days, but are off to promising starts.

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Marlborough, MA-based Egenera has raised $3 million in new equity financing, according to regulatory forms filed today. An executive for the company, which makes software for managing physical and virtual servers in corporate data centers, told Mass High Tech the funds came from existing investors, a group that includes Austin Ventures, Crosslink Capital, Kodiak Venture Partners, Pharos Capital Group, and Technology Crossover Ventures. Egenera raised $26 million in December 2007 and laid off 87 employees in November 2008.

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Now that the media craze around cloud computing seems to have died down just a bit, I thought it would be a good time to take a considered look at what one of the Northwest’s most prominent venture capital firms is working on in this space, which is having increasing influence in every area of software and information technology (IT).

Over the past couple of months, I’ve had a chance to talk with a number of VCs at Bellevue, WA-based Ignition Partners, and they’ve shared a great deal of knowledge and insight into how they think about cloud computing and virtualization. What follows is not a comprehensive look at the firm’s strategy, but rather a few thematic highlights that struck me as important to those interested in cloud-based technologies and business models. To an outside observer at least, what Ignition does in this area will go a long way towards determining its long-term success—and to some extent, it already has.

First, a couple of definitions. Cloud computing, as most see it, is about using remote servers run by vendors like Amazon or Google to store and process data over the Internet, instead of buying and maintaining your own local machines. In fact, Amazon’s chief technology officer, Werner Vogels, has a more industry-focused definition, one that Ignition Partners agrees with: cloud computing is “IT as a service,” delivered in a scalable way to multiple customers via the Web.

Virtualization is a related but different animal; it can be thought of as enabling cloud computing, among other things. Ignition defines virtualization as separating software from hardware—and applications from operating systems—so it lets you run multiple operating systems on a single server, for example, or multiple applications on your desktop, all with minimal setup and security hassles. Big companies like Microsoft, VMware, IBM, and Citrix compete heavily in this space.

But back to Ignition. The firm was founded in early 2000 by ex-Microsoft and McCaw Cellular executives, and now has more than $2 billion under management. It invests in both early-stage and growth-stage companies in the U.S. and China, focusing on consumer tech, communications and wireless, and business software and infrastructure. Ignition has received its fair share of criticism in the press, stemming from incidents like the closure of Sotto Wireless earlier this year, and last fall’s accounting scandal at Entellium—both companies it backed.

Yet Ignition is strong enough in cloud computing and virtualization that, given how central these issues have become to most aspects of IT, it seems like a key differentiator for the company. Especially at a time when most if not all venture firms are going back to basics and thinking about where their most valuable expertise lies. Indeed, Ignition’s biggest win to date was in virtualization: XenSource’s $500 million …Next Page »

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More and more big companies are supplying their employees not with standard desktop PCs and office software, but with “virtualized desktops.” If your company has made the switch, then your desktop may still look the same, but your office programs are actually running in your company’s data center, where a server is feeding a screen image to your machine over the company’s internal network.

It’s an attractive way to provide software to people in large organizations, since centralized services are far easier to maintain and upgrade. Vendors both large (Microsoft, Citrix, VMware) and small (Virtual Computer, InstallFree) are offering systems that make desktop virtualization more manageable, and research firm Gartner predicts that at least 15 percent of professional desktop PCs will be virtualized by 2014. But if an organization is very large or is extended across the globe, it can get tricky and expensive to keep hundreds or thousands of desktop-to-data-center connections open across a private network.

Cambridge, MA-based Akamai (NASDAQ: AKAM) is proposing an alternative. Today, the company is rolling out a new service that enables desktop virtualization over the open Internet, with help from Akamai’s network of 50,000 “edge servers” around the world. The company originally built this network to smooth the delivery of multimedia content to Web audiences, but has been enhancing it over the last few years so that companies can also use it to improve the performance of Web- and Internet-based software applications. (A contract drug research company in California called Synteract, for example, uses Akamai’s network to speed up the Web-based system its researchers use to log clinical trial data.) So it’s not much of a stretch for Akamai to invite companies to route their virtual desktop traffic through Akamai’s servers as well.

“We have spent a lot of time applying our newer capabilities to browser-based applications, but we also want to accelerate other types of applications that aren’t browser-based,” says Neil Cohen, Akamai’s director of product marketing. That meant tailoring the company’s existing “IP Application Accelerator” service to work with virtual desktop management software such as Citrix’s XenDesktop, VMware View, and Microsoft Enterprise Desktop Virtualization (known as MED-V).

All of these virtual desktop infrastructure products can smooth the switch to centralized desktop management—but they don’t deal with some of the inherent problems in Internet-based networking, which include bandwidth limitations and lost data packets, an annoyance that grows more serious with distance. “The farther away you get from the virtual infrastructure”—meaning, the data center where the applications are running—”the worse the performance gets,” Cohen says. Companies can cure that problem by expanding their private networks, but “if you have to build new pipes to new locations to maintain performance, it kind of defeats the point” of economizing through virtualization, Cohen points out.

By feeding their desktop traffic over Akamai’s network, Cohen says, companies can switch to a virtualized desktop infrastructure even in far-flung international offices without having to install expensive Internet lines or new networking hardware. They can also extend virtual desktops to workers who may be connecting from an airport or a home office, rather than over a company’s virtual private network. “Akamai believes there is a large opportunity to deliver high-performance virtual desktops to anyone, anywhere, anytime, rather than having them be constrained to be on their private networks,” says Cohen.

Akamai will sell the new desktop virtualization acceleration service directly to companies that are already deploying software from Citrix and other virtualization vendors. But it will also make the system available through Entisys Solutions, a Concord, CA-based reseller that works closely with Citrix. The price will depend on the number of employees using the technology, says Cohen.

Akamai is the first company to offer large enterprises a way to handle desktop virtualization purely over the Internet, Cohen says. “They now have a choice when they are thinking about investing in virtual desktop infrastructure,” he says. “They can ask ‘Am I better served deploying over the wide area network, or over the Internet with Akamai, where it’s cheaper to buy bandwidth.’”

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In 2004, Marathon Technologies abandoned its old hardware business to focus on “fault tolerance” software for Windows servers—programs that switch computing work from one server to another almost instaneously in the case of a hardware failure. Last year, in a move to adapt to the virtualization movement sweeping through the corporate IT world, Marathon brought out software that does the same thing for virtualized servers. Last month, the company raised $7 million in a Series B financing round led by Atlas Venture, Longworth Venture Partners, and Sierra Ventures. And today, the Littleton, MA-based startup is making one more big change: the company has announced that former IBM executive Jim Welch has joined as president and CEO, replacing former CEO Gary Phillips.

Welch tells Xconomy that Marathon has “a terrific technology foundation” that should appeal to more businesses as they stack more and more applications onto virtualized servers—meaning that these systems need to be just as reliable as traditional stand-alone servers. But Marathon hasn’t done a good job of explaining why its products are valuable, according to Welch; he says it’s been more focused on building great technologies than on figuring out what the market wants.

“I think you will see Marathon, under my leadership, very much transformed into a market-led company,” says Welch. “Under Gary’s guidance, the company grew phenomenally, but now it’s time to take that to a whole new level.”

At IBM, Welch was vice president and general manager of the InfoSphere data warehousing business. He’d been at Big Blue since its 2005 acquisition of Ascential Software, where, as vice president of product operations, he’d helped make the company into the leader in the $2 billion electronic data interchange (EDI) market.

Welch says that Marathon, which has 70 employees, will also build on its existing partnerships with Microsoft and Citrix to make its fault-tolerance and disaster recovery software work in more kinds of computing environments. “Today our tech is very much sold and used as a point solution,” protecting Windows servers, Welch says. “But the opportunity in the enterprise is obviously much more broad. I want to see us protecting Exchange servers or fetal heart monitors or whatever it may be. We need to continue to expand our capabilities for a heterogeneous world.”

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Akorri Networks, a Littleton, MA-based provider of software for physical and virtual IT infrastructure, has raised $5 million in equity financing of a proposed $5.9 million round of private capital, according to an SEC filing. The news website PE Hub reports that Akorri has previously raised more than $45 million from BlueStream Ventures, Matrix Partners, North Bridge Venture Partners, and Sigma Partners.

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Manchester, UK-based VirtenSys, which opened up U.S. headquarters in Beaverton, OR, in January, announced in a press release today that it has raised $16 million in a Series C funding round. Investors in the round included Scottish Equity Partners, Celtic House Venture Partners, and Gimv. Virtensys develops virtualization technology for servers in data centers. The money will be used to further expand its operations, including in the U.S.

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VMware (NYSE: VMW), the Palo Alto, CA-based virtualization subsidiary of Hopkinton, MA-based information management giant EMC (NYSE: EMC), said yesterday that it has agreed to acquire SpringSource for $420 million in cash and stock. The San Mateo company makes tools used by developers to write Java software. The deal, VMware’s largest acquisition to date, has some analysts scratching their heads, but VMware said it makes sense because SpringSource’s tools will help VMware customers build software that runs in virtualized internal or cloud computing environments.

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Marathon Technologies, a Littleton, MA-based provider of disaster recovery software for physical and virtual servers, has raised a $7 million round of equity financing, according to an SEC filing. A company spokesman confirmed the information in the filing, and said the company would disclose more details in the next week or so. The filing does not specify who invested in the round, but the firm’s board of directors includes Axel Bichara of Atlas Venture in Waltham, MA, Paul Margolis, a partner at Waltham venture firm Longworth Venture Partners, and Steven Williams, managing director of Sierra Ventures in Menlo Park, CA.

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According to regulatory documents filed yesterday, stealth Boston startup Akiba has closed a $6.53 million Series A venture capital round with participation by North Bridge Venture Partners and Foundation Capital. The company describes itself as developing a virtualization technology that makes it easier to manage relational databases in cloud-computing environments.

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Scene: An abandoned brick building along the Connecticut River. The image dissolves, then reforms to show a new, ultra-modern factory in its place. Move to interior shot of computers and server banks. Brilliant academics ponder the future. Highly trained young professionals walk purposefully, the future alive in their eyes.

I have no idea whether the scene depicted above is accurate. But that’s the vision planted in my mind by the announcement earlier this month that the state of Massachusetts and a coalition of corporate and academic institutions—MIT, Boston University, the University of Massachusetts, Cisco, and EMC—had banded together to plan a High Performance Computing Center (HPCC) for Holyoke, MA.

Xconomy broke the news about the HPCC on June 9. The general idea is that a state-of-the-art “green” data and computing center in Holyoke, cooled by the Connecticut’s waters and powered by affordable, renewable hydropower, will establish Massachusetts as a leader in next-generation computing technologies and bring jobs and dollars to the depressed Holyoke region. The center would presumably house the networked servers and storage systems needed to address complex research problems in fields from genomics to climate modeling, as well as various commercial projects. “The potential for breakthrough technologies and research is enormous,” said Governor Deval “the Govinnovator” Patrick in a statement, “and both the center and this collaboration will undoubtedly serve to lift up the City of Holyoke and regional economies throughout Western Massachusetts.”

That’s the essence of the coverage to date. But, of course, that is only the beginning of the story—since the plan hasn’t even been finalized yet. I was especially interested in the corporate angle to all this, since corporate innovation is an issue I’ve spent a book or two exploring. And while to date this column has dealt mainly with entrepreneurs, venture capitalists, and startups, innovation really does happen in big companies, too. And so, against the backdrop of the envisioned High Performance Computing Center in Holyoke, this is a look at such an attempt.

My guest for today’s column is Jeff Nick, SVP and chief technology officer for EMC. The story he tells isn’t just of a data storage and management company wanting to spur the construction of an advanced computing center to grow its current businesses. Rather, Nick laid out a multi-tiered strategy of how EMC plans to combine its shorter-term business ambitions with efforts to explore the future in virtual computing, cloud computing, data management, security, and more within the confines of the fully operational, fully commercial data center.

At a high level, Nick characterized the project as offering “three dimensions of opportunity” for EMC and its R&D strategy. The first lies in the opportunity to test new techniques involving the center’s physical infrastructure, what Nick calls “ping, power, and pipe.” (”Ping” is a new term for me that Nick says refers to the way cables are physically laid down to network computers together.)

Systems infrastructure, as opposed to the physical infrastructure, is the second area of opportunity EMC’s chief technology officer sees. This covers areas such as virtualization—the specialty of VMware, a California company that is majority-owned by EMC—and cloud computing, the domain of EMC’s Cloud Infrastructure and Services Division.

These technologies will be both the undergirding for, and to some extent the subject of, the research projects envisioned for the new center. For instance, Nick says the HPCC will …Next Page »

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[Updated June 17th with more details about financing]

Doyenz, a Bellevue, WA-based company whose cloud-based software allows IT consultants to set up and manage virtual IT infrastructures for their small-to-medium-sized business clients, has raised $1.5 million in new cash, according to a regulatory filing today. In connection with the financing, $2.8 million worth of debt is being converted into preferred stock worth $3.3 million, according to CEO and founder Ashutosh Tiwary.

Doyenz, founded in 2007, helps consultants set up “virtual appliances” such as remote servers, and provides a cloud-based testing lab where they can try out patches or configuration changes before deploying them to customers’ infrastructures, according to the company’s website. It also helps consultants create backup images of customers’ virtual infrastructures on their local networks, or in the cloud.

Tiwary has spent 25 years in the computer industry according to his biography on the Doyenz site. He worked previously for Microsoft, and was a co-founder of Performant, which was sold to Mercury in 2003 for $22.5 million.  Doyenz (the name comes from doyen, an experienced expert) focuses on small businesses who might find it more efficient to back up their local machines or even outsource their entire IT infrastructures to the cloud.  Members of the board include Xconomist Jeremy Jaech, a co-founder of Aldus and Visio who is now CEO of Seattle-based Verdiem.

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Yash Talreja says most people don’t know that cell phones were around for 30 years before they became affordable, useful, and prevalent devices for ordinary consumers. Now he says the same thing is happening with geographic information systems, or GIS. “For 30 years, it was a very specialized area,” Talreja says. “It was used by the very few.”

Nowadays, however, a confluence of forces is making GIS technology far more powerful, appealing, and pervasive—and San Diego’s resident expertise in software development and related technologies is putting the city near the center of the GIS development map. As a result, the San Diego Software Industry Council is organizing a GIS interest group to focus on various aspects of geospatial information processing, including geo-coding, location-based services, analysis, and visualization. Talreja, who is the group’s designated chair, says the combination of mapping technology, precise global positioning satellite technology, and the Internet with its search engine capabilities has made GIS one of the industry’s hottest sectors in the past two or three years.

Finding something on Google Maps is one thing, Talreja says. But the problem becomes more interesting when you get hungry while driving around, and the map interface on your phone or GPS device identifies and locates five restaurants within a six-block radius. Talreja says the spread of such location-based services means “The time will soon come when you’re gas tank indicator light comes up, and the map shows you where the nearest gas station is located.”

“There is a massive amount of data lying around that is related to a spot on the map, (environmental, traffic, health),” Bob Slapin, executive director of the software industry council, tells me by e-mail. “This data is often in different silos and in most cases making sense of it requires running around, finding it and mapping it somehow. The data is often structured and unstructured,” meaning software with a certain versatility is required to process it.

Slapin says he’s involved with EcoLayers, a San Diego GIS company developing interesting applications for watershed management. “This may sound boring but there is a realization that the control of water quality has a significant impact on the available water resources. Present management of this data is a nightmare.”

While San Diego’s software industry has about 10 active special interest groups (Slapin says, “we call them BIGS, Business Interest Groups”), there seems to be a special regional strength in geospatial systems. “We noticed …Next Page »

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EMC (NYSE:EMC) is upping its presence in the market for software to manage both physical and virtual servers in data centers, revealing yesterday that it plans to acquire existing partner Configuresoft for an undisclosed amount. Hopkinton, MA-based EMC says the buyout further advances its strategy to offer software for managing and servicing the computer servers and other equipment that together form the IT infrastructures of large organizations.

Configuresoft, based in Colorado Springs, CO, is a developer of software for managing and configuring both physical and virtual servers. EMC struck a deal with the 10-year-old firm last year to provide Configuresoft’s software to customers under the EMC brand. That agreement and the buyout deal both stem from EMC’s desire to help companies manage virtualization technology, according to Margaret Rimmler, vice president of EMC’s resource management software group. Virtualization enables single servers to run multiple operating systems and applications, or to consolidate multiple machines to run applications as though they were one.

“With the original [agreement] and now with the acquisition,” Rimmler says, “it solidifies the position of having a full suite of solutions for our customers in both managing the physical and the virtual [data center]—and we think the virtual part is increasingly important.”

EMC is, of course, the majority owner VMware (NYSE:VMW), a major provider of virtualization software for desktop computers and data centers. Yet while VMware’s products enable virtualization of servers, Configuresoft’s products provide companies with the ability to configure and manage those virtual servers automatically.

EMC, which expects to close the Configuresoft buyout in June, plans to continue Configuresoft’s operations in Colorado Springs and employ most of its 150 workers after the deal is done, Rimmler says. After the acquisition is closed, Configuresoft will become part of Rimmler’s resource management software group at EMC. EMC does not plan to continue operations at Configuresoft’s London office.

The Configuresoft buyout builds on EMC’s previous acquisitions and product development in the past several years to expand beyond its mainstay IT storage business, Rimmler notes. To name one of dozens of examples, EMC purchased privately held Smarts in late 2004 for $260 million to offer companies Smarts’ software for diagnosing problems in IT networks. The addition of Configuresoft brings this capability down to the server level.

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The climate in Boston this week was neither steamy nor stormy. Likewise, the week in deals was a little bit hot and a little bit cold —with not much on either extreme.

—Oracle flexed its muscle in Massachusetts, acquiring Lowell, MA-based Virtual Iron for an undisclosed sum. Virtual Iron specializes in virtualization technology, which allows multiple servers to behave as one, or enables a single server to juggle multiple operating systems.

—Waltham, MA-based drug developer Artisan Pharma raised $9.4 million in a round of debt financing.  The company’s SEC filing did not name the investors.

—Cambridge’s MetaCarta raised $910K in convertible debt with help from Sevin Rosen Funds, FA Technology, and Hunt Ventures. MetaCarta’s software plots the geographic location of news items onto digital maps.

—Wind turbines are coming to the Bay State, though not to the Cape: Massachusetts received $25M from the Department of Energy to build a turbine blade-testing facility in Charlestown. The center will specialize in the testing of large blades up to 300 feet in length and will be the first such facility located outside of Europe.

—MyVu added $3.25 million to the $11.5 million it raised in January 2006. Atlas Venture and Hillman Capital are listed as “related persons” in the latest SEC filing of the Westwood, MA company, a maker of LCD video goggles.

—GrandBanks, a Newton Center, MA-based venture capital firm, continues to support Canadian tech startups. The latest beneficiary is Toronto’s I Love Rewards, developers of an online catalog that allows corporate clients to incentivize employee performance. GrandBanks was joined by JLA Ventures and Lawrence Capital in this Series B round of financing, which totaled either $5.7 million (according to a GrandBanks announcement) …Next Page »

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Veteran software entrepreneur and investment banker Michael Orbach is joining Seattle-based Cascadia Capital today. As a new managing director in the investment bank, Orbach will focus on mergers and acquisitions, as well as capital raises, in software and services—all in the mid-market range of $20 million to $500 million deals. The new hiring looks to be a strategic move to strengthen Cascadia’s national and global presence in information technology.

Orbach comes most recently from Palo Alto, CA-based Pagemill Partners. But he is a Seattle-area resident and says he has been commuting to Silicon Valley for 12 years. In the early 1980s, he co-founded Simulation Sciences in the U.K. (he’s a native of Manchester), and took the company public in the early 1990s. After Simulation Sciences was bought by Invensys, Orbach joined Aspen Technology and handled mergers and acquisitions, moving to the Seattle area with that company’s purchase of Industrial Systems, Inc. in Bothell, WA, in 1995.

“We liked the place,” Orbach says. “My family was suffering major culture shock between Manchester and California.” Orbach also got his MBA at the University of Washington.

The professional rationale for Orbach’s latest move is equal parts opportunity and timing. “There’s a very large opportunity to build a software and services practice here at Cascadia,” Orbach says. Cascadia Capital has a strong national brand in capital raising, and it can use that strength to grow its mergers and acquisitions business. That sort of leverage between M&A and capital raising expertise, he says, “is very appropriate in the market today.”

And why is that? “You tend to build out new business models and get the best growth strategy when you’re coming out of a recession,” Orbach says. And because of the dearth of IPOs, startups looking for an exit have little choice but to get acquired, he says. That, of course, gives buyers the upper hand in negotiations. “The economics of buying companies has never been better. For the Oracles, SAPs, and Microsofts, less and less will they make internally, and more and more will they buy,” he says. What’s more, how they’re buying has changed radically in recent years. “M&A has become a national/global practice,” Orbach says. “The days of looking at specific geographies or specific verticals are gone, because the technologies cross those.”

What all this means is that the precise skills of bankers making deals in the technology space are more important than ever. “The days of watching lawyers doctor the deal are long gone,” Orbach says. Bankers have to position a company’s financials to a prospective buyer in the right way, which means having a deep understanding of where the technology and the business model fits into the market, and of what the buyers want. Orbach says he draws on his experience as an entrepreneur, as well as having lived in many parts of the world with diverse cultures (the U.S. and U.K., France, Germany, Switzerland, and South Africa).

We didn’t get a chance in this conversation to dive deep into software M&A trends yet, but Orbach did offer a hint at what he’s looking at. “Venture capitalists are focused on triage. Many businesses need something done. Not only here, but everywhere,” he says. “As we come out of this recession, the dealmaking will be done in countercyclical markets.” He points to a few specific areas to watch: IT infrastructure, virtualization, legal, and corporate governance, risk, and compliance. We’ll be watching to see what effect this all has on Cascadia’s dealmaking, and the broader IT world.

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Database giant Oracle (NASDAQ: ORCL) has scaled up its presence in Massachusetts—and placed itself in more direct competition with Hopkinton, MA-based EMC’s VMware subsidiary—by announcing its intention to acquire Virtual Iron, a maker of data center virtualization software in Lowell, MA.

Redwood Shores, CA-based Oracle already has its own virtualization technology, called Oracle VM. The software can be used to virtualize enterprise servers whether they’re running software from Oracle or other vendors. (Virtualization allows companies to run multiple applications on multiple operating systems on a single server, or to make multiple servers behave as if they’re a single machine. It’s been a hot corner of the enterprise software world for the last several years, because it helps companies exploit the capacity of their existing hardware and lower overall IT expenditures.)

But Oracle says that Virtual Iron’s software will make its virtualization technology more powerful, especially when it comes to managing how virtual servers get configured, controlling the deployment of hardware resources in virtualized data centers in real time, and managing power consumption.

Those are areas where Virtual Iron’s software excels. But as we’ve noted in past profiles of the startup (in August 2007 and again in October 2007), Virtual Iron’s products are mainly known for being inexpensive: the company’s software provides virtualization management capabilities comparable to those provided by VMware, at less than half the cost. Virtual Iron touts the fact that the core of its system is an open-source “hypervisor” or virtualization manager called Xen, which helps keep costs down; VMware uses a proprietary hypervisor.

It’s not clear yet how Virtual Iron’s enterprise virtualization package will be incorporated into Oracle’s software or what effect such a change might have on the pricing of Oracle VM (which also uses the Xen hypervisor). Oracle says it’s in the process of evaluating Virtual Iron’s product roadmap. The acquisition itself—the financial terms of which were not disclosed—isn’t expected to be finalized until this summer.

Virtual Iron isn’t talking about the deal. The standard “supporting quote” provided by Oracle’s public relations office, attributed to vice president of Linux and virtualization engineering Wim Coekaerts, goes as follows: “Industry trends are driving demand for virtualization as a way to reduce operating expenses and support green IT strategies without sacrificing quality of service. With the addition of Virtual Iron, Oracle expects to enable customers to more dynamically manage their server capacity and optimize their power consumption. The acquisition is consistent with Oracle’s strategy to provide comprehensive enterprise software management and will facilitate more efficient management of application service levels.”

The acquisition is also consistent with Oracle’s strategy to bolster its product lineup through acquisitions; nearly 50 of the company’s major product families are the legacies of acquisitions of companies large and small, from BEA to Peoplesoft to Siebel. The Virtual Iron deal comes just weeks after Oracle said it would buy Sun Microsystems (which has its own extensive suite of virtualization management products, again based on Xen).

Virtual Iron, which was founded in 2001 and was originally known as Katana Technology, will operate independently until the acquisition clears all regulatory and legal hurdles. The company has raised at least $65 million in venture funding, including a $13 million Series D round in November 2007 and a $20 million Series E round in January 2008; its backers include Intel Capital, Goldman Sachs, Highland Capital Partners, and Matrix Partners. How much those investors might make on the deal won’t be clear until Oracle makes its next quarterly financial disclosure; the fact that the financial details aren’t being disclosed now CNET’s Gordon Haff speculates, may mean that Virtual Iron was “a relatively cheap buy for Oracle.”

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Oracle (NASDAQ:ORCL), the Redwood Shores, CA-based technology giant, says this morning that it has agreed to buy Virtual Iron Software, headquartered in Lowell, MA, to boost its presence in the market for server virtualization software. The transaction is expected to close this summer, according to Oracle, which did not disclose financial terms of the deal. Virtual Iron is a privately held company backed by venture groups such as Highland Capital Partners, Matrix Partners, Goldman Sachs, Intel Capital, and SAP Ventures. [Update 2:00 p.m. May 13, 2009: We've just published a longer report about the Virtual Iron acquisition.]

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In the past month, Luke and I had the opportunity to sit down with Tom Alberg, the co-founder and managing director of Seattle’s Madrona Venture Group, for a wide-ranging discussion. In earlier installments, we’ve reported on Alberg’s thoughts about the future of newspapers, as well as the rise of the high-tech innovation cluster in Seattle, which has paralleled his career as a partner at Perkins Coie, a senior executive at McCaw Cellular, and a prominent venture capitalist.

Armed with a deeper (and broader) perspective on the history of the Seattle technology scene, the two of us could better dive in and address some of Alberg’s investment strategies in the current economic climate. We also heard about specific areas to watch in the tech-business world—and where Alberg sees his firm’s real competition coming from.

Here is an edited account of the rest of our conversation:

Xconomy: What are you seeing out there these days?

Tom Alberg: One of my major themes on investing has been more of a revenue focus. When an entrepreneur comes in here, often they’re talking about the technology, which is good to talk about, or how much money they’re going to be able to sell this company for someday. I say, “We’re not here to talk about the exits.” I always want to know, what is it that you’re making or selling that somebody would want to buy? Why would they want to buy it? Whether it’s a big company buying your software or an individual buying something on the Internet. What is it that you’re actually selling, and what is the value to somebody?

That’s the test, whether they’re going to pay for this someday. It’s surprising how hard it is to get this out of somebody making a presentation to you. Not always, but sometimes. They want to talk about everything but that, [focusing instead on] “this is what we do, this is why people are going to love us, this is why it’s revolutionary.” What it means is you’re focused on getting customers earlier, get a beta out there and learn from a beta product. That lends itself much better to what’s going on today. On the other hand, there are companies where you have to put a lot of money in to get to a point where they can be successful.

X: So at what stage does Madrona want to get involved?

TA: Well, the other thing that has happened recently is it’s much cheaper to start a company, and actually launch a product. People are doing with much less, which is probably healthy. Often, they’re not coming to the venture capitalist until they’ve actually got something that works. Their strategy is maybe to get a higher valuation than if they come early. There’s a bunch of companies that got going pretty well without venture capital. They don’t always have a lot of revenue. Groundspeak [based in Seattle] has the location and geocaching thing, it has a lot of traffic. The photo site Picnik gets a lot of traffic, and they’re doing well. They haven’t taken any venture money. I always say our real competition is more there, in some ways.

We depend on angels, there’s no question. We do a lot of really early stage [deals]. We’ll do $400,000 to help develop an idea, so in that sense we do invest in business plans. But it’s with the idea of getting a product out quickly.

X: The billion dollar question, of course, is where will the next Amazon emerge?

TA: That’s hard to tell. We have some themes. Cloud computing. Virtualization. We still …Next Page »

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Portsmouth, NH-based VKernel, which makes software that helps companies extract better performance from virtualized servers, has raised $7.06 million in Series B venture funding, according to documents filed yesterday with the Securities and Exchange Commission. New investor Longworth Venture Partners led the round, which was joined by existing investors Polaris Venture Partners and Hummer Winblad Venture Partners. Together with a $4.6 million Series A round in January 2008, that brings VKernel’s total funding to about $11.7 million. VKernel executives, who had planned an official announcement about the funding round for next week, were unavailable for comment today.

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