Atlas Venture Kills It with Isilon Acquisition

For Atlas Venture, the road has been a bit bumpy in recent years. Last year, for example, it generated some unwanted attention right here after downsizing its London office and parting with four stateside partners, in some measure because it raised only $293 million for its eighth fund, instead of the $500 million the firm had targeted.

Its picture is looking considerably brighter today. Not only has Atlas sold a few portfolio companies this year, with another in registration, but this morning, EMC announced that it’s paying $2.25 billion for Isilon, a publicly traded, 9-year-old storage maker which counts Atlas as its largest shareholder. Isilon’s shares are currently trading above $33 per share.

It’s some recovery for both Atlas and Isilon.

Though Isilon raised $108 in a late 2006 IPO, its revenue projections repeatedly fell short of the guidance it was giving Wall Street. By January of last year, its stock was trading at between $1 and $2, down from its $13 IPO price.

Sujah Patel, a former RealNetworks developer who founded the company, stepped back into the fold as CEO, and “just did a wonderful job of realizing its potential,” says Isilon board member and Atlas Venture Partner Barry Fidelman

Certainly, the company’s recent trajectory has also been aided by some outside factors, not least of which was Hewlett-Packard’s high-profile acquisition of data storage company 3PAR for $2.35 billion back in September.

That Isilon operates in an exploding space also helps. The company is among other storage makers focused on network-attached storage, which lets its customers — including Facebook — quickly build large clusters of storage devices for faster data access. Clustered storage is particularly key in storing high-definition media applications, which requires storage of massive amounts of data.

Several reports have suggested that EMC may have paid a premium for Isilon owing to other bidders for the company, whose market cap has soared in recent months and was $1.75 billion as of Friday. Fidelman, who has been on Isilon’s board since 2001, declined to comment on whether or not those reports are accurate.

Fidelman says Atlas will make $473 million off the deal for a multiple of 20x its original investment. (In addition to the company’s pre-public rounds, Atlas also purchased nearly $1 million worth of Isilon’s stock last year when it was trading at $3.40.)

Asked if the outcome might prompt Atlas to hit the fund-raising trail for its ninth fund faster than otherwise, Fidelman said, “There’s still plenty of money to invest out of the current fund; I don’t think there will be any rush to raise more money.” He adds that the firm’s majority investment in Isilon comes from its fifth fund, which closed with $704 million in 2000. “You can do the arithmetic,” he says. “It doesn’t return the fund, but it makes a nice dent.”

Isilon’s other venture investors include Sequoia Capital, Madrona Venture Group, and Fidelity.

Earlier today, Madrona told Xconomy that it had invested a total of $15 million in Isilon and expects its overall return to be between 15x and 20x that amount. Sequoia, Isilon’s second largest shareholder as of September, will also make out nicely.

Per Isilon’s proxy statement dated April 26, Atlas Venture Fund V LP owns 15,051,590 shares (for an overall stake of 23.09%), Sequoia Capital X owns 11,651,603 shares (17.87%) and Madrona Venture Fund I-A LP owns 8,714,176 shares (13.37%).