Sramana Mitra: That brings me to an observation that there has been a dramatic drop in networking-related venture or even angel deals. Can you comment on that?
Rick Tinsley: For many years most networking customers were just happy buying things from Cisco – you don’t get fired for buying things from Cisco. We have seen that metaphor play out in many industries over the years, but sooner or later, if technology offers a superior alternative, things will change.
There are several reasons why things haven’t changed more quickly. Number one is that you had one vendor that dominated this, sector and large customers tend to be very much in a silo. The lessons we learned in virtualizing the compute infrastructure have largely yet to be applied to the networking silo. We see this on a daily basis, because often our customers often choose to buy the hardware versions of our products – network managers and operating people – because we offer both, the hardware version and the software equivalent. The interesting thing is that often these selections are being overruled by more senior IT people – perhaps a VP level or a CIO. There they say, “Look, if we can buy this product in either hardware or software form, almost always we want to use the software equivalent.” This tells me that the trend is gradually spreading through the IT organization, but it hasn’t filtered down to all levels. That represents a disruptive opportunity that tells me that over the next five years things are going to change radically. That is why we want to be ahead of the change rather than being dragged along, kicking and screaming after the fact.
SM: You are seeing the opportunity in a lot of solutions that were hardware solutions being decoupled from the hardware and offered as a software solution.
RT: That is correct.
SM: I think part of what we are seeing is that the exits are small, and maybe these are smaller opportunities. But there are definitely problems that can be solved and there is expertise to solve those problems. Do you see those as venture-scale opportunities, or are these smaller niche opportunities?
RT: That is a good question. The metric has changed in two ways. A lot of the people who invested in my previous companies were typically people like me. They were networking specialists. A lot of those people have either retired from venture capital or they have moved into different fields because there hasn’t been a lot of venture activity in general in the networking sector over the past decade. The reason is the assumption that it is really hard for a startup company in networking to compete with Cisco, the dominant networking supplier of all types of networking components. They have done a good job at bundling and leveraging their broad product line. They had become the de facto standard within corporate networking organizations. The shine was off the apple for networking as a sector for venture capitalists to invest in.
Today, a company like ours can compete with a very different business model – a software model rather than a hardware model. The other side of the coin is we can be very capital efficient. As I mentioned, my background is semiconductors. I used to design chips and I worked at chip companies. The first couple of networking businesses I worked in we did custom hardware, custom printed circuit boards, etc. It is extremely capital intensive to build products like that. Historically, this was how all network products were built. We needed a lot more money to do a custom hardware product.
When things started to shift to standard appliance models, that was a lot more capital efficient. You didn’t need as much capital to get to a given level of sales or profitability. If you fast forward to today, if we were starting the company today we wouldn’t even bother with appliances, we would just deliver the product to software only. That is even more capital efficient. I think historically networking was a wasteland for startup opportunities. There were always a few exceptions, but it certainly wasn’t the fertile ground it was back in the 1990s, which was the fertile ground for networking.