Forwarding a very interesting article from the Red Herring:
herring.com
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COULD BE CONTENDERS
Venture capitalists are backing Cisco's potential challengers.
By Alex Gove
BFR, or "big friggin' router," is already a pass‚ term in venture capital circles. Last year, venture-funded companies making Gigabit Ethernet routers for enterprise LANs were popping up faster than weeds. But this year, VCs are more interested in Terabit Ethernet routers for WANs and backbones.
Jim Breyer of Accel Partners says that his peers are shifting their focus to WAN infrastructure investments for three reasons: the international and domestic markets for these products are growing, Cisco Systems is less dominant in the carrier market, and ISPs like MCI, AT&T, and WorldCom are likely to invest hundreds of millions of dollars in the coming years to upgrade their infrastructures.
This change is significant. Although Cisco's growth into new markets once seemed unstoppable, VCs aren't so sure anymore. Today's networking startups are building so much speed and functionality into their silicon and software products and working in such heterogeneous environments that they might become big friggin' companies in their own right.
Room for everybody
There is no doubt that VCs are betting big on terabit routers. New Enterprise Associates (NEA), Kleiner Perkins Caufield & Byers, Crosspoint Venture Partners, Institutional Venture Partners, AT&T Ventures, and others have invested in the "super router" developer Juniper Networks (see "Photonic Synthesis"). Other venture-backed startups in this space include Avici Systems (Accel, Polaris Venture Partners, Brentwood Venture Capital, and others), Argon Networks (Greylock Management, Matrix Partners, and others), and Pluris (Weiss, Peck & Greer Venture Partners; Communications Ventures; and Vanguard Venture Partners). All this despite the fact that carriers are notoriously slow moving; according to Mr. Breyer, the market requires 12- to 18-month sales cycles.
David Aronoff of Greylock jokes about the hype in this segment. Although Cisco's 12000 Series Gigabit Switch Router is one of the most advanced products on the market, he says that he expects some of the terabit startups' public relations people to dismiss it as an "edge device," or one that's less critical to a WAN than a terabit router.
Peter Morris of NEA maintains that there will be plenty of room for startups because carriers require a variety of switching interfaces. Walter Kortschak of Summit Partners concurs: "I don't see why there shouldn't be several Ciscos in this space."
Mr. Morris goes one step further. He says that the complex requirements of terabit routers will force more networking systems onto silicon; he sees this trend, coupled with Cisco's dependence on its proprietary architecture, transforming Cisco from a manufacturer with 60 percent margins into a distributor with 20 percent margins. "The system envelope of silicon is exploding," he argues. (For more on the trend toward moving network functionality onto application-specific integrated circuits, or ASICs, see "Chipping Away at the Old Block.") He compares the future state of networking to today's computer market, where Compaq and Dell are essentially distributors, and Intel is the real computer manufacturer. Over time, he says, the same thing will happen to networking companies: "In the future, Cisco and Ascend will be like Gateway and Dell today--distributors of advanced silicon."
Mr. Kortschak believes that because Ciena lacks a sizable amount of intellectual property, it too will become fundamentally a distributor. Last year, Summit invested $120 million in E-Tek Dynamics, twice as much as it did in its next-biggest investment. Founded in 1983, E-Tek makes fiber-optic components and subsystems for systems manufacturers like Ciena. Last year, it generated $73 million in sales and is currently on a $100 million run rate.
Big MACs
Mr. Aronoff thinks that the growing complexity of components will give rise to new businesses. As the die size of ASICs shrinks, the gate count increases, yielding more complex systems on a chip. He predicts that increasingly companies will license rather than develop the intellectual property they need in order to build their own particular systems on a chip. As one example, he cites a gigabit media access control (MAC), an essential feature of a chip that controls access to transmission technologies like token ring, Carrier Sense Multiple Access/Collision Detection (CSMA/CD), Ethernet, or Fiber Distributed Data Interface (FDDI). "Not everybody is going to develop a gigabit MAC," he states, "but everyone needs one, so they'll license it from somebody else." These new components will also create new software niches, he says: "The opportunities today aren't just for the guys who put the gates on the ASICs; they're also in the software that sits on top of these chips."
Barry Eggers of Weiss, Peck & Greer agrees, asserting that Pluris is unique in the terabit routing field precisely because its approach is software-centric. According to Mr. Eggers, the company is applying principles of massively parallel computing to the problem of terabit routing. "Pluris is building a software-based system that looks more like the kind of central office equipment you'd find in a voice network--something that you turn on once and can use to replace other hardware while it's still on," he says. One application could be placing a Pluris terabit router into a network access point (NAP). "Today a lot of different equipment in a NAP provides infrastructure and services. A Pluris product in there would significantly reduce the amount of equipment required to provide those same services," he claims. Though Mr. Eggers would not reveal exactly how Pluris intended to do this, he says the company stands out because it is not just concentrating on routing.
Software-based switches already are making their presence known in the area of bandwidth management. Last year, Greylock restarted a company called Xedia, whose switches use class-based queuing techniques that allow ISPs to allot bandwidth to priority customers, who can then regulate bandwidth within their own enterprises. Mr. Breyer of Accel takes this idea one step further when he states that companies classified today as intranet or client/server could just as easily be characterized as communications companies. Two companies that fit this description are Bright Tiger, which has raised $4 million from North Bridge Venture Partners and Accel, and Packeteer, which has raised $10.3 million from NEA, Enterprise Ventures, Onset Enterprise Associates, Sterling Payot Capital, and private investors. Mr. Breyer expects significant opportunities for software companies like Bright Tiger and Packeteer that track and regulate networks' performance.
Tuning in to Fibre Channel
Mr. Morris of NEA believes the real networking opportunity may lie inside the enterprise. Up until now, he says, data sent to businesses has been hitting two bottlenecks: the Small Computer System Interface (or SCSI) has limited the traffic in most LANs to a maximum of 45 mbps, and no broadband technology connects disk arrays to servers. This situation will only be exacerbated as backbone speeds rise. But according to Gadzoox Networks, which makes Fibre Channel hubs, the number of network connections for server storage subsystems will surpass the number of client connections by the year 1999. Fibre Channel products alleviate this problem by increasing bandwidth and the flexibility of connections between servers and storage devices or between servers and other servers.
Mr. Aronoff says that Fibre Channel "has already been done." But Chris Schaepe of Weiss, Peck & Greer thinks it's "really heating up," although it's not as crowded an arena as Gigabit Ethernet because employees with both networking and storage skills are scarce. Gadzoox and Brocade Communications Systems are the two most notable venture-backed companies in this space. Gadzoox will generate more than $30 million in revenues over the next year and has raised $21.5 million from NEA, Onset, private investors, and Seagate Technology.
Mr. Schaepe says that he and his partners have decided to focus on Fibre Channel switches instead of hubs because they think that switches will eventually eat into the market for hubs just as they have in the datacom market. Brocade, which makes Fibre Channel switches, earned $6 million in the quarter that ended in October, only the third quarter in which it has been shipping. Weiss, Peck & Greer recently led a $20 million mezzanine round for the company. Other investors include Crosspoint Venture Partners; Mohr, Davidow Ventures; Norwest Venture Capital; LSI Logic; Andy Bechtolsheim; and others.
The idea that history could repeat itself in networking certainly gives one pause. Will Cisco dominate the switching market? Perhaps. But since Cisco faces more competition than ever before in both the LAN and the WAN markets, even this $55 billion behemoth will have to choose its battles. Few VCs doubt that Cisco will continue to be a major force in networking. But will it be the only force? A year ago it probably was, but with so much change in the networking space, continued total domination by Cisco seems less likely every day.
Networking VCs
Recent Investments
Accel Partners
Palo Alto, CA
650/614-4800
7 Professionals
Jim Breyer, Peter Wagner
$500M Under Management
Representative investments: AccessLan, Avici, Bright Tiger, Foundry Networks, FreeGate, Vertical Networks
www.accel.com
ARCH Venture Partners
Chicago, IL
773/380-6600
7 Professionals
Keith Crandell, Robert Nelsen
$42M Under Management
Representative investments: Apropos Technology, Internet Dynamics, New Era Of Networks
www.archventure.com
AT&T Ventures
908/221-7061
TK
Brad Burnham
TK
Representative investments: Juniper Networks
No Web site.
Battery Ventures
Wellesley, MA
617/237-1001
7 Professionals
Todd Dagres
$380M Under Management
Representative Investments: Flow Wise, Packet Engines, Radnet
www.battery.com
Bessemer Venture Partners
Menlo Park, CA
650/853-7000
11 Professionals
David Cowan
$400M Under Management
Representative investments: Aptis, Maker, Triton
www.bessemervp.com
Boulder Ventures
Boulder, Colorado
303/444-6950
3 Professionals
Kyle Lefkoff
$30M under management
Representative Investments: Compatible Systems, McDATA
No Web site.
Brentwood Venture Capital
Menlo Park, CA
415/854-7691
5 Professionals
John Walecka
$450M Under Management
Representative investments: Avici, Xylan, ObjectStream
www.brentwoodvc.com
Charles River Ventures
Waltham, MA
781/487-7060
6 Professionals
Rick Burnes, Mike Zak
$312 million under management
Representative Investments: Aptis Communications, OMNIA Communications, Sonus Networks
www.crv.com
Communications Ventures
Palo Alto, CA
415/325-9600
2 Professionals
Cliff Higgerson, Roland Van der Meer
$75M Under Management
Representative Investments: Ellipsys Technologies, Monterey Networks, Pluris
www.comven.com
Crosspoint Venture Partners
Los Altos, CA
415/948-8300
5 Professionals
Seth Neiman, Richard Shapero
$500M Under Management
Representative Investments: Brocade Communications Systems, Foundry Networks, Juniper Networks, NetBoost
www.crosspointvc.com
Draper Fisher Jurvetson
Redwood City, California
415/599-9000
5 professionals
John Fisher, Steve Jurvetson, Tim Draper
$200M under management
Representative Investments: Combinet, Lightwave Microsystems, Praxon
www.DraperVC.com
Greylock Management
Boston, MA
617/423-5525
9 Professionals
David Aronoff
$400M Under Management
Representative Investments: Argon Networks, Xedia
No Web site.
Information Technology Ventures
Menlo Park, CA
650/854-5500
3 Professionals
Sam Lee
$77M Under Management
Representative Investments: Berkeley Networks, Epigram
www.itventures.com
Institutional Venture Partners
Menlo Park, CA
415/854-0132
8 Professionals
Tom Dyal, Bill Tai, Geoff Yang
$540M Under Management
Representative Investments: Juniper Networks, MMC Networks, SkyStream, WaveSpan
www.netsmart.com/ivp/
Interwest Partners
Menlo Park, CA
415-854-8585
9 Professionals
Flip Gianos
$600M Under Management
Representative Investments: Copper Mountain, Ramp Communications, Starlight Networks
www.interwest.com
Kleiner Perkins Caufield & Byers
Menlo Park, CA
650/233-2750
10 Professionals
John Doerr, Vinod Khosla
$1B Under Management
Representative Investments: Diamond Lane, Extreme Networks, Fiberlane Communications, Juniper Networks
www.kpcb.com
Matrix Partners
Waltham, MA
617/890-2244
6 Professionals
Andrew Marcuvitz
Representative Investments: Argon Networks
www.matrixpartners.com
Mayfield Fund
Menlo Park, CA
650/854-5560
11 Professionals
Yogen Dalal, Kevin Fong
$700M Under Management
Representative Investments: Assured Access Technology, Packet Engines, Redback Networks, Vixel
www.mayfield.com
Menlo Ventures
Menlo Park, CA
415/854-8540
6 Professionals
John Jarve
$710M Under Management
Representative Investments: Carrier Access, Prominet, Vixel
www.menloventures.com
Mohr Davidow Ventures
Menlo Park, CA
650/854-7236
7 professionals
Jon Feiber
$250M Under Management
Representative investments: Brocade Communications Systems , Epigram , Ipsilon Networks , Jetstream Communications
www.mdv.com
New Enterprise Associates
Menlo Park, CA
650/854-9499
18 Professionals
Peter Barris, Dick Kramlich, Peter Morris
$750M Under Management
Representative Investments: Alteon Networks, Gadzoox Networks, Juniper Networks, Packeteer
www.nea.com
Norwest Venture Capital
Palo Alto, CA
415/321-8000
9 Professionals
Promod Haque
$750M Under Management
Representative Investments: Brocade Communications Systems, Extreme Networks, Quadritek Systems, Xedia
www.norwestvc.com
Oak Investment Partners
Menlo Park, CA
415/614-3700
6 Professionals
Bandel Carano
$725M Under Management
Representative Investments:
www.oakinv.com
Onset Ventures
Menlo Park, CA
650-529-0700
5 Professionals
Susan Mason
$200M Under Management
Representative Investments: Alteon Networks, Bright Tiger, Gadzoox Networks, Packeteer
www.onset.com
Polaris Venture Partners
617/290-0770
4 Professionals
Jonathan Flint
$85M Under Management
Representative Investments: Avici
www.polarisventures.com
Sequoia Capital
Menlo Park, CA
650/854-3927
8 Professionals
Mike Goguen, Doug Leone
$750M Under Management
Representative Investments: Assured Access, Redback Networks, Yago Systems
www.sequoiacap.com
Sevin Rosen Funds
Palo Alto, CA
415/326-0550
7 Professionals
Steve Domenik, Jennifer Gill Roberts
$325M Under Management
Representative Investments: Sentient Networks, Shomiti Systems, Softcom Microsystems
www.srfunds.com
Sigma Partners
415-854-1300
8 Professionals
Wade Woodson
$300M Under Management
Representative Investments: Argon Networks, Cascade Communications, OnStream Networks
www.sigmapartners.com
Summit Partners
Palo Alto, CA
650/321-1166
25 Professionals
Walter Kortschak
$3B Under Management
Representative Investments: Ditech, E-Tek Dynamics
www.summitpartners.com
Sutter Hill Ventures
Palo Alto, CA
650/493-5600
5 Professionals
Tench Coxe
$175M Under Management
Representative Investments: Alteon Networks, Copper Mountain Networks, Ipsilon Networks
www.shv.com
Venrock Associates
Palo Alto, CA
415/493-5577
8 Professionals
Tony Sun
$500M Under Management
Representative Investments: New Oak, Ramp, FlowWise
No Web site.
Weiss, Peck & Greer
San Francisco, CA
415/622-6864
10 Professionals
Barry Eggers, Chris Schaepe
$400M Under Management
Representative Investments: Brocade Communications Systems, Pluris
www.wpgvp.com
Zero Stage Capital
Cambridge, MA
617/876-5355
3 Professionals
Stan Fung
$85 Million under management.
Representative Investments: Acacia Networks, Octocom/Telebit
No Web site.
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