From The Deal.com
10/18/01
By Clifford Carlsen

Sphera Inc. of Boston and Israel landed $15 million in a second-round endorsement of its Web hosting software products, despite a market where target customers are increasingly fragile.

The company credited a year of commercial sales and several relationships with key resellers as clinching the deal, which valued the company at slightly lower than its $45 million first round appraisal. Sphera CEO Tamar Naor said a strong team of international backers and traction in the infrastructure automation market allowed the company to continue to draw international support in a tough fund-raising climate.

"We started raising money about seven months ago, and it wasn't easy," Naor said. She called the round a "tremendous validation of our technology, product and business model."

Naor said the company did not use an outside financial adviser and only targeted venture firms that operate both in the U.S. and abroad.

New investor TLcom Capital Partners, a London-based Internet infrastructure specialist affiliated with J.P. Morgan Chase & Co., led the round with London based Jerusalem Venture Partners, which was Sphera's first institutional backer with a $2.5 million seed round in July 1998. Other investors include first round leader Gemini Israel Funds and Reuters Venture Capital and CSK Venture Capital, which also contributed to the September 2000 round.

Sphera's product was conceived to allow Web hosting systems administrators to automate certain functions but quickly evolved into a platform product to handle most operations for Web site operators. That shift provided a key selling point with hosting service providers, which resell the software with promises of cost savings.

Such a selling arrangement became crucial as Web site operators' venture capital bonanzas began to dry up last year, and they increasingly looked to their vendors for ways to cut operating costs.

Sphera competes with companies including Alabanza Inc. of White Plains, N.Y.; Ensim Corp. of Sunnyvale, Calif. and Plesk Inc. of Chantilly, Va.

Laurel Bowden, principal with Jerusalem Venture Partners, said that since Sphera was founded at the peak of Internet promise in 1998 it has focused on licensed software for automating Web hosting. Although its market has changed, the company has kept the same revenue model and essential product focus, but concentrates more tightly on expanding sales through reseller partners.

"The product has evolved over time, but the core business has remained the same," Bowden said. "They always have targeted both direct and OEM sales, but in this market the emphasis on those relationships is key." Bowden said that even though the deal got a decrease in valuation, she said it compared very favorably to other term sheets available in the current investing climate, and said it reflected progress the company has made in attracting customers and partners.

Naor would not disclose Sphera's revenue, but she said the company has lined up partnerships with Internet data center operator Dialtone Internet Inc. of Fort Lauderdale, Fla., U.K.-based Poptel, Toshiba in Japan and IBM Corp. for its European data centers.

Naor was recruited as CEO in January 2000 after having headed international sales and marketing for Silicon Valley software startup Net Dynamics Inc., which Sun Microsystems Inc. bought in 1998. The Israeli-born executive moved Sphera's headquarters to Boston to be closer to its main market, but retains engineering functions in Ramat-Gan, Israel.

Building international markets, she said, has been behind the company's every strategic move, including investor choice. Naor reazlies how world events can affect expansion.

"This funding will allow us to break even early next year, and this will be the final private round of investment," Naor said. "But the world situation is making every business proposition more risky, and we are looking forward to the world being safer as we grow."