How Arista Networks affects Venture Capitalists

Back in May I wrote this post on the deficient state of venture capital funding for large scale networking projects.  At the time, I was not thinking about green tech and companies like Solyndra.  I was focused on the network, how it is changing and networking technologies – not social networking or web marketing firms like Groupon; my prior GRPN comments are in this post.

At time I was writing my thoughts on how the network is changing, what I was not thinking about was how Arista Networks is affecting the ecosystem inSilicon Valley.  If you are looking for an analysis of Arista Networks, this is not it.  I am thinking about Arista, but this is not intended as a technology or solution overview; maybe I will do that for another day.

To understand what I am thinking about, we need to go back to Nuova Systems.  Cisco acquired the company in April 2008.  From this company emerged the Nexus 5000 class set of products.  What was unique about the company was the funding and the impact it has had on others in the Cisco ecosystem.  Think about where Cisco stood in 2008.  For the FY2008, Cisco sold $13.46B in switching products.  (Note that Cisco’s fiscal year is August-July).  FY2008 was the peak year in Cisco switching revenue before the onset of the global credit crisis in September 2008.  I have detailed the 2009 catch-up spend event here and here, but consider the world before the credit crisis induced spending collapse and subsequent catch-up phase.  Cisco was the dominate market share owner in switching.  There was no one close and they had spent their acquisition capital from the start on this market segment.  This is a just a partial list of Cisco’s switching centric deals starting the most important being Crescendo in 1992.  This list alone totals $6.2B:

• 24-Sep-93 Crescendo Communications     LAN switching                    $94,500,000
• 24-Oct-94 Kalpana                                              LAN switching                    $204,000,000
• 6-Nov-95 Grand Junction Networks           LAN switching                    $220,000,000
• 6-Aug-96 Nashoba Networks                         LAN switching                    $100,000,000
• 3-Sep-96 Granite Systems                               LAN switching                    $220,000,000
• 31-Aug-99 IBM Networking HW Div          Computer networking      $2,000,000,000
• 11-Apr-00 PentaCom                                       LAN switching                     $118,000,000
• 20-Aug-02 Andiamo Systems                      Datacenter Switching       $2,500,000,000
• 29-Jun-04 Actona Technologies                 Data storage                         $82,000,000
• 8-Apr-08 Nuova Systems, Inc.                    Datacenter Switching        $678,000,000

Total  $6,216,500,000

Nuova was started in mid-2005.  It was self funded by the Cisco executives who left to form the company. This list included: Mario Mazzola, Luca Cafiero, Prem Jain, Soni Jiandani as well as outsiders Ed Bugnion and Tom Lyon.  In August 2006, Cisco increased their ownership to 80%.  In April 2007, Nuova had ~200 employees and Cisco agreed to a cap of the potential buyout of remaining 20% at $678M.  A year later, April 2008 Cisco closed the deal to acquire the remaining 20% for $678M.  No venture capital firms were involved to my knowledge. Jayshree Ullalleft Cisco in May 2008.

Back to the list of Cisco acquisitions from the 1990s; Granite Systems was founded by Andy Bechtolsheim and David Cheriton.  In 2008, Andy Bechtolsheim became Chairman and CDO at Arista networks, which he had founded a few years earlier with David Cheriton.  Jayshree became CEO in October 2008.

In October 2008, Sequoia Capital produced a presentation for their portfolio companies entitled “RIP Good Times.”  It should be noted that Sequoia was the first and I think only VC to invest in Cisco before the IPO in 1990.  In the month of October 2008 these events are occurring:

1. Cisco is having their best switching quarter in their history with revenues closing at $3.54B ending the fiscal year at $10.4B.

2. Sequoia (original Cisco VC) is telling their portfolio companies to cut burn rates, conserve cash, reduce expectations and go into the bunker.

3. Arista namesJayshree UllalCEO. They are just a few months away from their first sale, focused on low latency, high performance compute clusters against Infiniband.

4.  Juniper is a few months into the development phase for QFabric.

Did I mention that like Nuova, Arista does not have any venture capital firms as investors?  At least to my knowledge there are no VC investors.  My prediction is we will look back on October 2008 as a pivotal month in the history of networking.  The few venture capitalists focused on networking dug in for a long winter’s nap.  Their thesis was why be invested in a market in which Cisco is the dominant company?  It is also a market that requires a high level of capital to be successful and is perceived to be a mature market – all of which describes a poor set of conditions for entrepreneurial companies.  It is much easier to invest in mobile apps and web properties, than fight incumbents that have scale and capital advantages.

A small group found that the darkest of times was not the time to sleep.  It was the time to plot a revolution and start a new company.  While the powerful were distracted – others saw opportunity.  That is what was happening in October 2008.  As I have written in the past, we are on the verge of significant shift in the structure of the network.  It is not clear who the winners will be.  The manner in which Arista is affecting the venture capital community is in the terms of lost opportunity.  Arista is aggressively marketing the company to the investment community and I suspect they will have large and successful IPO in 2012 – an IPO in which no VCs will participate and no LPs will receive shares.  I have seen only one other early stage startup in the datacenter space.  There are two others that I know of marketing an A round, but the game is afoot and the clock is ticking.  This is not some Openflow appliance game; I am referring to a big league game for real estate in the datacenter – the skyscrapers of the future.  If this was 1992 or 1998 there would be 6-10 players in the space – but it is 2011 and it is hard to find players for the big game.

I wrote this in early 2006 and without being around any of the events in October 2008, I would hypothesize that this is what was happening.  “The victors in any revolution are the companies that are led by great leaders who understand the cycle of change and strategize not for victory on the day of revolution, but for victory in [end].  When Microsoft becomes an old regime and the conditions required to support a new revolution materialize, revolutionaries will come forth.  Even today there are revolutionaries who operate in fear of Microsoft.  Similar to the formative years that shaped a young Bill Gates; the new revolutionaries might be students at Harvard, MIT, and Stanford or located in far away places such as Moscow, India, and China.  They might even be employees of Microsoft.  At night they clandestinely plot the downfall of Microsoft in darkened basements of their homes, fearing that Microsoft will not discover their treacherous plots for they know it will cost them their jobs.  This is where revolutions begin.  They begin with the revolutionary who is motivated by the quest for change, the desire for power, and the belief in a higher ideal, a better plane of existence that in the end will provide some form of social justice and personal satisfaction.  Revolutions start when people create a solution to a complex problem.  The people working inside Google are clearly revolutionaries who are planning to attack Microsoft from outside the computer operating system.  Google’s strategy looks very much like the new generation of service providers who want to offer a service without owning a network.  Google is looking to create applications that reside in the web and do not require a specific operating system.  If Google can find a way to bypass Microsoft’s core advantage in their dominance of the personal computer operating system and productivity application markets, it will mean that Microsoft will have a major revolution to endure.  The United States is born from revolution.  We have adopted an economic structure that is not perfect, but it fosters change.  The United States changes its government every two to four years.  We have a predicable timeline of points when change might occur, called elections.  We have an economic system that rewards success and punishes failure.  We have a private equity mechanism in place that encourages risk, supports revolutions, and rewards success.  “…in America you can drop out of college and start Microsoft, Oracle or Dell.  You can get a “C” grade at the Yale School of Management and still launch FedEx.  You can dropkick your Ph.D. pursuit and start Google,” [see Rich Karlgaard, Why we Need Startups, Forbes, July 21, 2003].  The result is a nation-state that is far from perfect, but has an infrastructure in place that supports change and revolutions.  The roots of this system can be traced back to the Sons of Liberty in Boston during the years leading up to the American Revolution.  The people that confronted the government in London found their financial backing from private funds within the American colonies.  Privately raised funds were not being used to start a new biotech startup on the banks of the Charles River in 1775, but they were being used to fund the active opposition to General Gage, his military forces in Boston, and the English Monarchy of King George the III.  This is how wealth, revolution, and ideas are linked.”

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **