- Distribution channel is controlled by incumbents. Enterprises we speak with expect network virtualization to be bundled with the virtualization solution they consume. These whole solutions are created and sold in large part by the likes of Cisco (w/ VMWare + EMC via VCE), IBM, HP, or Dell. Or by up and comers like Arista who partners with VMWare and others to build whole solutions. Arista has succeeded at building distribution because they have a ‘hot’ box that customers demand – which is harder than it looks. This is also increasingly true in the service provider market where large carriers outsource the development, deployment, and in some cases operations of their networks to companies like Ericsson, Huawei, and ALU.
- The ‘S’ in software-defined networking is for software — which means unless your company is one of the few on an amazing revenue ramp, most acquirers will look at your SDN company from a build vs buy lens. Meaning the cost to buy the company can’t be dramatically more than the cost to build the product. One rule of thumb to consider is acquirers typically pay 2X – 4X the development cost of a product — unless there’s a huge potential bump in revenue or strategic risk for major revenue loss.
- Most of the logical acquirers are either a) financially hurting (e.g. they can’t afford to pay up, like a HP, JNPR, Brocade etc); or b) are bottom feeders (e.g. historically pay low multiples for companies – VMWare, Oracle, IBM, etc). Brad adds a good point by adding that this a sign of the times. With the macroeconomic picture a muddle, theres’s a limit as how much anyone will pay for software-based infrastructure.
During our exchange, Brad brought up another valid point which is, it’s not clear that hardware-driven networking vendors can adapt to a software-driven business model. If they acquire a successful SDN startup, regardless of what they pay for it, and then try to graft that software onto a box-based business model, the acquisition will ultimately fail. These aren’t bolt-on acquisitions. The acquirer might have to change how it does business to succeed in this market.
Another strike against large SDN / network virtualization acquisitions is, given my knowledge about the personal and institutional investors of the hottest SDN startups, an industry dynamic has been unintentionally created that limits those startups ability to structure an effective bidding war for their startups.
I think the only place where Brad and I may disagree is his statement that ”the VC investments we’ve seen heretofore in SDN already suggest that it is perceived differently from the linear networking markets that have preceded it.” That may true for Andreessen Horowitz and their investment in Nicira though a) Nicira is AH’s first networking investment; and b) from my customer inputs, Nicira today appears more like a company that uses professional services to finance software development, than the VMWare of networking. There is nothing wrong with this approach, it’s just not revolutionary. If we look at other venture capitalists who’ve invested in SDN — they are primarily the same investors who’ve financing the previous round of networking companies with the same linear investment structures and thesis.