Venture capitalists turn tail rather than compete against Cisco
By Brad Reese on Fri, 03/27/09 - 9:45pm.
Seven venture capitalists lost $110 million on the seven-year-old start-up Hammerhead and I fear that this will be the death of VC funding for young companies with products that could compete against Cisco.
According to a report in VentureBeat, here are the seven venture capital firms that funded Hammerhead Systems, which closed its doors last week:
Apex Venture Partners
Enterprise Partners Venture Capital
Foundation Capital
Lighthouse Capital
Mayfield Fund
Pequot Ventures
Silver Creek Ventures
The Mercury News reported that Hammerhead CEO and Founder - Rob Keil - a former Cisco alum who launched the Cisco MGX 8800 Series Switches, tried to fish for buyers of Hammerhead's Layer 2.5 Aggregation, Interworking and Migration technology, but he only got nibbles and no bites.
However, yours truly found it most curious that the Mercury News noted:
Cisco, known for its acquisitive ways, may have seemed an obvious buyer. But some observers point out that Cisco's business strategy is evolving to include servers and consumer electronics, as illustrated by its announced plans to acquire Flip camera maker Pure Digital.
A source close to Hammerhead told yours truly, "Hammerhead had great venture capitalists across the board, but Foundation Capital was a real standout having also incubated the company. Rob Keil was the founder and visionary behind Hammerhead Systems and he ran the company for the first 16 months and the last 9 months. He raised the initial funding from veteran telecom venture capitalists: Foundation Capital (Calix, Vivace), Mayfield (Crescendo and RedBack) and Enterprise Partners (Juniper). These veteran VCs understood the need for a highly differentiated box that delivered the performance of a router and the flexibility, manageability and price performance of a switch. They also understood that the telecom infrastructure was outdated and desperately needed to be replaced. Keil started and finished the book, though a lot happened in the middle when two other CEOs burned through 90% of the money raised...this is one case where the VCs should have let the entrepreneur stay at the helm..."
The source continued, "The carriers are like the outdated U.S. infractructure-folks don't want to think about it and they hope everything will be OK and then one day a bridge in Minneapolis collapses and folks realize they waited too long. Reality is that large incumbent vendors don't have to do what's best for their customers...they don't have to buy from a company that has innovated and delivered unique technology that customers want like bandwidth pooling and performance in one box vs. 4 Cisco boxes... and guess who loses when innovative startups like Hammerhead go away? Carriers...their only choice now will be to buy from large incumbents who are more than happy to sell them multiple boxes and who won't worry about customer integration or price performance."
An Overview of the Technology Developed by Hammerhead Systems:
According to the Hammerhead website, its HSX 6000 is the first in a new category of Layer 2.5 edge platforms enabling aggregation, interworking and migration of the full breadth of access protocols across any core infrastructure. Hammerhead’s Layer 2.5 aggregation approach combines the best of Layer 3 application awareness and MPLS connectivity with the best of Layer 2 economics, operations and interworking.
The HSX 6000 scales from 2.5G to 120G in I/O capacity (full duplex) in a compact 1/4-rack footprint, offering Service Providers long-awaited innovations in Edge Switch technology, a 10X improvement in density of service interfaces, and dramatic reductions in overall system costs. Addressing the service provider’s needs of simultaneously performing service aggregation, service interworking, and network migration, the HSX 6000 incorporates Pseudowire Emulation Edge-to-Edge (PWE3) and Dry Martini implementations; extensive Ethernet support (native GigE and EoS); support for a wide range of services from EVPL (E-LINE) and VPLS (E-LAN) to IP Leased Line Aggregation (PPP/MLPPP/HDLC), Frame Relay/MLFR, and ATM/IMA; and complete Any-to-Any Service Interworking.
The following is a list of Hammerhead HSX 6000 solutions:
Multiservice Edge Aggregation and Switching
Ethernet Virtual Private Line (E-LINE)
Ethernet Virtual Private LAN Services (E-LAN)
Residential Broadband Aggregation
Carrier Ethernet Multicast Framework
Do you agree with yours truly, that venture capitalists will no longer fund networking startups that compete against Cisco, unless they know they can later sell it to Cisco?
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No Point..
I never understood why any VC would fund a company that goes right up against Cisco. Unless its in an area that Cisco is not serious about. You would have to be insane to fund a company to go against them with any type of infrastructure product.
Maybe someone should tell the VC's that are continually dumping money into Force10 (or whatever they are now) that there money aint coming back. They really never stood a chance.
Riverbed gave it a run, but there dying a slow death now, since Cisco has become serious about the space.
A VC's best bet is to find a niche that you don't think Cisco will become serious about, fund them till they get a product out there that Cisco can't realistically catch, and hope that Cisco or Juniper buys them and you can turn a profit.
There's always a market for a Cisco alternative
Not everyone buys 100% of Cisco's products just because it's Cisco. I think the slow death is happening to Cisco because they've become too big to innovate. Smaller companies with great products are realizing they don't have to sell out to Cisco to compete and grow.
You mention Juniper. They were once a start up, created to go after Cisco's core technology, L3 routing. We all agree they're doing well. Juniper routers and Netscreen firewalls more than hold their own against Cisco equivalents.
Riverbed is one of those small companies that is doing well from what I see. Good technology that's been ahead of Cisco from day one and still ahead, maybe even separating farther ahead? This would be great technology for Cisco to buy. It'd be Cisco's next billion dollar product but let's hope this doesn't happen as we all know the product will double in price.
Cisco shoots itself in the foot
As Cisco shoots itself in the foot with its "attitude" towards the secondary Cisco hardware market, HP ProCurve will keep on "stealing" market share from Cisco!
Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
Will Cisco be the General Motors of tomorrow?
Obviously, venture capitalists are proving no match for Cisco.
However, yours truly absolutely believes that entrepreneurs with "fire in their belly" can kick Cisco's butt!
Will Cisco be the General Motors of tomorrow?
Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
Risk vs. Reward
VCs live in a world of risk vs. reward and will fund a startup that competes against Cisco if the startup's business plan is sound enough to merit risking their capital. This means that the startup's gear cannot be just incrementally better performing or incrementally cheaper. Instead, the startup must have something that is really disruptive to the status quo, in order to give the VCs the proper reward for their investment.
Likewise, the top-tier carriers are not going to invest the 2-3 years required to usher a startup's gear through their processes for lab trials, field trials, and OSS/BSS support unless they can calculate a suitable return on this investment of resources. Being just incrementally better than their incumbent vendors is not good enough to justify the expense of a carrier qualifying a new vendor.
In the case of Hammerhead, there is no idea or capability in the slideware shown that other vendors are not also claiming. In the end, they did not stand out enough or execute well enough to gain the paying customers required to continue operations. The VCs risked $110M, Hammerhead burned through it, and now the VCs are left with no reward. Their next investments now carry the burden of having to make up for the write-offs of the Hammerhead capital.
Disclaimer: I have a long position in CSCO.
Barriers to entry
Perhaps the barriers to entry around its core markets are giving Cisco the confidence that it can now focus capital and management attention on products sold in Wal-Mart (i.e. Flip video).
Also, how can the consolidation of carriers be good for startup networking vendors?
The consolidation of the radio station industry by Clear Channel Communcations and its total lack of passion for music makes me thankful for the Internet and Hylit Radio in Philadelphia!
Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
Enterprise vs Service Provider
The point here is not only going against Cisco, but the market segment. Companies like Juniper, Redback & Ciena gave some competition to Cisco in SP market but this was mostly before the 2000 Telecom bust. In the last decade tier I service provides haven't encourage or entertained any start-up; which definitely makes sense for the VCs not fund companies in service provider space competing against Cisco. Also the amount the money required to pump in before you call it quits is very high. The Risk/Reward ratio is just not worth it.
Is this good for service providers?
Hi Meher,
Is this good for service providers?
Brad Reese
BradReese.Com Cisco Refurbished
Game over..
When was the last time you saw a SP put a start-ups product into their network? Couple problems immediately come to mind; 1. the start-ups product must be OSMINE certified which costs at least $5M and can take years to complete. 2. If the SP really wants your product they'll simply ask Cisco (or Lucent) to build it, ie. the ROADM. Why risk the start-up going out of business. Given Cisco owns +90% install base in the Enterprise -- what are your chances of succeeding in the Enterprise? Bottom line... any venture capitalist who pours money into a data networking product targeting either of these markets needs to have their head examined.
Cisco has had its failures too
Cisco has had its failures too.
I sincerely hope that Hammerhead Founder - Rob Keil as well as his team at Hammerhead pick themselves up and try again.
Never, ever give up!
Brad Reese
BradReese.Com Cisco Refurbished
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