When investment firm Edison Ventures decided to contribute the majority of a recent $16 million round of funding for application delivery controller provider Kemp Technologies, investment manager Lenard Marcus acknowledged that some initial risk was incurred.
Kemp Technologies' potential in an otherwise underserved market, however, is what made it worth that risk, Marcus says.
"There's a pretty strong demand for the products, and the company is having good success and still has yet to turn into several untapped markets that it needs to penetrate," he says.
Edison Ventures contributed $7.5 million to the funding initiative through a joint buyout with equity investment firm Kennet Partners and advisory service provider Orix aimed at improving product development, marketing and sales at Kemp Technologies.
According to Marcus, Edison initiated the funding because of what his firm saw as an underserved need among small and midsize businesses. Kemp was the only company really competing for these customers, and with additional funding, Marcus hoped it could retain that position.
"It took some time to win them over, as usual, but they recognized that the market opportunity was big enough to warrant an investment," Marcus says.
In its 10-year history, Kemp had been proudly self-funded, according to Peter Melerud, company co-founder and vice president of product management, but was tempted by the opportunity to invest in the research, development and marketing resources to bolster its position as a leading application development controller and load balancing provider.
"The load balance and ADC market as a whole is always in a state of flux and change," Melerud says. "Most recently we certainly saw a lot of expansion in customers for application-specific requirements in the Microsoft space, particularly for Kemp but also in other vertical markets, and we needed to be able to increase our R&D capacity, as well as sales and various graphic markets. So to be able to really cover a number of application verticals as well as customer profile verticals we really needed to step up and take a leadership role."
Specifically, Kemp fills a void between application vendors and their SMBs customers. This need is somewhat unique to SMBs, according to Melerud, because they lack the internal resources to maintain high-performance application delivery on their own. Suddenly receiving an additional $16 million from investors who support Kemp's initial business plan will only help as it looks to further penetrate this market.
"Our core market has always been small and medium businesses and, in that regard, what's happening is that the application vendors are providing some terrific solutions to the customers, but they're saying [the customers] are going to have to go and work with a networking company to deliver ADC," Melerud says. "And that's kind of where we fit very well, because we provide some pretty core networking and scalability capacities for the customers deploying the applications, and at the same time we're providing the application vendors a low-cost, easy-to-deploy option to work with their partners, so that kind of partnership has really expanded our market quite a bit."
Outsiders also view the funding as a safe investment as Kemp builds on its lead in the market. Tracy Korbo, principal research analyst with Enterprise Management Associates, noted in a company blog post that the funding will "help flesh out some of the missing pieces" for Kemp, such as "more advanced features and deeper integration with network monitoring solutions."
The only risk to the investment stems from the market's profitable outlook, and whether other companies recognize it as well. With such high upside for an underserved market, the sudden emergence of competitors has not been ruled out. As Korbo acknowledged in her blog post, the high demand could make for unexpected developments in the application delivery space.
"The market remains competitive and those that don't keep up are assimilated," Korbo wrote. "The rate of change is putting strain on the network architecture. Solutions that address the ability to keep networks up and running will continue to remain relevant in the coming years, despite the shifting sands of change. 2012 looks to be anything but dull."
Melerud sees Kemp Technologies as the current leader in the market, having gotten a head start on all others and building on that with its new funding initiative. Marcus, however, acknowledges that the potential for competition needs to be anticipated regardless, no matter how likely or unlikely it may seem.
"You always take the competitive landscape into mind when you make an investment," Marcus says. "We think this market is large enough to warrant multiple entities, but from a competitive landscape what we looked at was the Linux-based system is so reliable and so durable on an SMB as well as an enterprise level. I do think that you always have the ability of some larger competitors to come downstream, but quite oftentimes their cost structure won't allow them to do that and be competitive."
For now, though, Melerud, Marcus and the rest of the investors are putting their faith in Kemp's ability to continue developing its progress for this market. If the company can retain its current status at the top, Melerud sees itself playing a much larger role down the line.
"Being able to offer a cost-effective solution that's providing just the right mix of technology for the SMB is absolutely critical," he says. "It's definitely going to expand as the SMBs start adapting Web-facing applications. And we absolutely feel that's going to be a very big part of our growth."