This week, global software-defined WAN (SD-WAN) provider Aryaka announced its series D financing round. The round was led by two new investors, Third Point Ventures and Deutsche Telekom Capital Partners (DTCP), displaying strong endorsement of the company’s global SD-WAN platform. Existing investors participated in the round, too, demonstrating its belief in the potential of SD-WAN and Aryaka.
SD-WANs have been seen by some to be the death knell for traditional service providers offering MPLS and IP VPN, and until now, no investment in the technology has been made by a major telecommunications company.
To better understand what preceded DTCP’s positive appraisal of the SD-WAN market and why it chose to invest into Aryaka, I interviewed Jack Young, partner and head of venture capital at DTCP.
You, as a venture capitalist, look at hundreds of potential investments every year. What is the investment philosophy at DTCP?
Jack: Before I get into the details, I would first like to provide a bit of background information to DTCP. As the name suggests, our firm is the investment arm of the global network operator Deutsche Telekom (DT). We have $2 billion in assets under management and advisory across multiple funds, and our portfolio includes over 70 companies. We operate autonomously from DT, who is the single LP for the funds.
Aryaka will be DTCP’s tenth new venture investment in the last 18 months. We typically aim for an investment timeframe of about five years, despite having enjoyed two quick exits so far. The first one was Replay which was acquired by Intel, and second Nexmo, which was recently purchased by Vonage.
Every VC has a different strategy when it comes to investing. DTCP is primarily driven by financial returns, and we invest across a variety of deep-tech digital start-ups in the TMT space with enterprise-proven business models. DT has long-standing business relationships with most of the Fortune 500 companies in Germany and many enterprises across Europe. We strive to add value to our portfolio companies by leveraging DT’s network.
We understand that telecommunication companies are facing a challenge from the over-the-top providers, and we want to better understand this transition.
Telecoms are aware of the risk of becoming “dumb pipes,” so we are investing in companies that are gaining traction in cloud computing and/or enterprise software. We also like vendors catering to businesses of all sizes. One last positive factor is the company’s plan to expand overseas. If Europe is a target market, we hope to leverage DT to make inroads easier.
What does DTCP like about the SD-WAN market?
Jack: There are several things about SD-WAN that fall into our investment thesis. First, the technology has been around for about five to six years but has been driven by traction in the U.S. Now that there is some movement to Europe, it provides us with an opportunity to use our strengths to help it grow. Also, after an initial wave of hype, where it was hard to understand what an SD-WAN is and is not, the framework for an SD-WAN seems much better defined and the technology innovation is aligned in the right direction.
The pilot deployments we have seen offer good ROI, and the market is starting to shift towards SD-WAN and away from MPLS, which for decades was the preferred technology. Increasing cloud usage has been fueling this trend. When a business uses a SaaS-based application, there is nothing to install, so deployments can move much quicker and MPLS, in comparison, just cannot keep up. Right now, MPLS is a $10 billion-plus market, and we believe SD-WAN will take a big bite out of the market as it becomes the de facto standard for the enterprise WAN.
Why do you believe SD-WAN has sustainability over the long term?
Jack: I think it’s already showing its long-term promise. If you look at the Gartner Hype Cycle, most technologies go into the “trough of disillusionment” after they reach the “peak of inflated expectations,” as it seems customers rarely get the payback expected from a technology when the level of hype is the highest. SD-WAN seems like it never went through the trough, and now we should start to see broader and faster adoption.
One important thing to note is that SD-WAN technology is not reinventing the wheel. It’s an evolution of the WAN with a new type of network topology. Therefore, we believe SD-WAN is much better positioned than data center software-defined networking (SDN). It’s the way of the future.
The SD-WAN market is crowded right now with lots of mature vendors and start-ups. What was it that you liked about Aryaka?
Jack: There are a number of things we like about Aryaka. Its biggest strength is that it owns the network where the biggest source of application performance challenges lies: the “middle mile.” By building its own middle mile, Aryaka can provide end-to-end application performance optimization, which makes it ideal for companies with a global presence, particularly if their countries of residence provide challenging networks.
Switching over to an SD-WAN from MPLS overnight can pose a risk, as the internet isn’t designed for performance. Many of the other solutions, particularly the “do it yourself” (DIY) ones rely too heavily on the internet for transport. This may work in the U.S. where networks are ubiquitous and bandwidth is plentiful, but in other parts of the world, DIY solutions can be hard to architect.
Since Aryaka owns the middle mile, it is ideally suited for global scalability, and that’s what we feel is its biggest differentiator. The best proof of Aryaka’s potential is that hundreds of customers currently use their service.
DTCP’s investment can be used by Aryaka to invest more in sales and marketing to further accelerate growth.