onstor_logo_nastag2ONStor, the ill-fated maker of data storage equipment for enterprises, has sold to software provider LSI Corporation for about $25 million, a paltry sum compared to the $130 million in venture capital it raised since its founding in 2001.

The big losers in the deal are ONStor’s fairly prestigious investors, including Foundation Capital, Velocity Interactive Group, Mayfield Fund and Worldview Technology Partners, among others.

Signs of trouble arose in April 2008 when the Campbell, Calif., company yanked its IPO filing. At the time, the company said it was going to wait to hit profitability before pursuing a public offering — it seemed like the market was demanding profitability as a prerequisite. Clearly, when the downturn set in, locking up the exit market, these aspirations were swept under the rug.

But even before it started eyeing a potential IPO, ONStor was feeling the crunch of competition in the storage market. Just the year before, several major competitors like 3Par, Compellent, Data Domain and Netazza held successful IPOs only to see their stock prices drop immediately. And this before the economy started to slide. Interest in storage application developers hasn’t picked up since.

All of these factors probably contributed to the company’s low acquisition price. The bargain deal certainly makes sense on LSI’s side — the buy could go a long way toward strengthening its market presence and competitive edge. With ONStor’s technology in hand, it could rival network storage offerings from IBM and NetApp.

How exactly LSI plans to capitalize on the deal has not been disclosed, but it’s expected to reveal more during its earnings announcement next week.

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