NetworkWorldFusion Article including quotes from Clearstone Managing Director, William Quigley

By Bob Brown and Linda Leung Linda Leung, NetworkWorld.com
March 18, 2005 05:30 PM ET

As we embarked upon our whirlwind visit with venture capitalists in Silicon Valley one day earlier this month, our first two meetings started in nearly identical fashion. Receptionists cordially ushered us into window-encased boardrooms, then quizzed us about our projector system needs. The assumption seemed to be: You’re here to pitch our partners on an idea for a new company, right?

Actually, our intention was roughly the opposite. We were there to get the VCs to pitch us on their view of the enterprise network scene and to give us a feel for where they are placing their bets.

The upshot, based on our visit with five investors, is that despite the dominance of vendors such as Cisco and Microsoft, plenty of money is available for creative enterprise network start-ups. The VCs said they are increasingly thinking globally, especially about China, and are aggressively seeking to discover entrepreneurs who can provide true industry leadership. Meanwhile, they’re trying to be cautious not to overfund areas, such as search, and not overlook seemingly passé areas, such as carrier services.

We made our first stop at Lightspeed Venture Partners in Menlo Park, where we met with Barry Eggers, a general partner who oversaw acquisitions and other projects at Cisco before becoming a venture capitalist in 1997.

Eggers said that the mood these days on Sand Hill Rd., a mecca for venture investors, “is optimistic — without caution — that things are coming back. Overall, it seems like companies are willing to do business with start-ups again.”

This has particularly been true with carriers over the past 12 to 18 months, said Eggers, whose investments include Ellacoya Networks, a company that sells products designed to help service providers make the most of their broadband offerings. Although making investments in actual service provider start-ups has been more or less taboo since a rash of CLECs went under a few years back, Eggers says that certain types of service providers might even warrant a fresh look if they can figure out “how to turn dumb pipes into smart pipes.” But he said it is challenging to figure out how to make money on services such as VoIP since the success of offerings like those from Vonage basically come down to spending marketing dollars. “It’s tough to compete on that front with the AT&Ts of the world,” he said.

Eggers says his company rounds up CIOs and other IT pros to peek at new companies, and among the most sought-after technologies are those for getting more out of the low-cost server platforms upon which companies are building their data centers. “Now it’s all about managing all that and billing for it and providing quality of service.” He teased us about a stealthy investment of Lightspeed’s called ScaleMP that is building SMP systems from off-the-shelf hardware.

Like many of the other investors we were to meet with that day, Eggers also said start-ups have a great opportunity in making applications run better across the WAN as companies re-centralize their networks and seek to deliver full-fledged apps to remote workers.

Janice Roberts and Yogen Dalal, managing directors down the road at venture firm Mayfield, picked up this theme when we visited them next. One of Mayfield’s investments, Peribit, makes products for improving application performance over WANs.

“Branch offices are out of control,” Dalal said. As companies consolidate data centers they need to ensure that remote offices’ net needs are being well served, he said.

Roberts, a former 3Com executive who like some of her colleagues has a particular interest in wireless and mobile networking, said one motivating factor behind starting enterprise network companies is that the industry desperately needs a few competitors to keep Cisco honest.

“It’ll be interesting to see how Juniper’s moves [such as its NetScreen acquisition] play out in the enterprise,” she said. “Foundry and Extreme have sort of stalled. Without strong competition we won’t see much innovation.”

One result of Cisco having extinguished much of its competition is that the company isn’t as good a source of new entrepreneurs as it used to be, said Dalal, who serves on the boards of such companies as Packet Design and PacketHop.

“Cisco used to be a good source for product marketing people,” he said. “But they aren’t scrappy enough, the company has become more bureaucratic. It’s getting to the point where, like with IBM, you wouldn’t look there to find real entrepreneurial people.”

Dalal said the industry could really use some new stars to share the spotlight with Cisco CEO John Chambers. “It’s time for some fresh faces,” he said.

One of Roberts’ former cohorts at 3Com, the company’s onetime CEO and current chairman, Eric Benhamou, said he is trying to do something about the paucity of such industry leaders as head of Benhamou Global Ventures.

Benhamou, who eschews the label venture capitalist, stresses that he is investing his own money in the companies with which he works and has taken the unusual tack of serving as chairman for most of them (including metro Ethernet supplier Atrica, mobile computing company PalmOne and application acceleration specialist Swan Labs). He said he is trying to spend the bulk of his time grooming entrepreneurs “to build companies the right way.” He is even starting up a teaching gig this year at a Silicon Valley office of international business school INSEAD.

“Most VCs are not too creative at solving problems,” Benhamou said. “Shooting the CEO is a very blunt instrument. They don’t know how to coach CEOs, so they end up wasting a lot of talent.”

Benhamou said that he doesn’t think today’s network industry executives are any less savvy than those 10 or 15 years ago, but did say that with the industry’s maturation, only incremental enhancements can be made in many areas. “Now innovation is minor tuning,” he said.

Still, Benhamou said there are good opportunities, citing areas such as WAN optimization where even if you are helping a company save 10% on its usual spending, that could add up to $100,000 or more. He also said that shifts to VoIP and more comprehensive security should provide opportunities for newcomers to win customers.

Benhamou, like others we spoke to that day, also cited China as having huge potential in networking, and noted that he’s been making trips there for 10 years now. With the world’s largest population of cell phone users, China is a huge wireless and service opportunity, as technologies such as WiMax emerge, he said.

“Most venture folks have just discovered China,” he said.

Chinese manufacturers and IT pros are both proving to be innovative thinkers Benhamou says. The Chinese have proven particularly aggressive in lowering the cost of making products, a fact that could make life tough for equipment makers used to big profit margins on their routers and other products, he said. The lack of rules such as Sarbanes-Oxley also make Chinese company CIOs less wary about trying new technologies and products, he said.

Before joining up with Benhamou, we squeezed in lunch across the street with William Quigley, a managing director at Clearstone Venture Partners, which has offices in Santa Monica and Menlo Park.

Quigley said his firm has raised a new fund and is eager to put some of that money to work in new companies. “We’re want to take some big risks, but we’re finding a lot more base hits than home runs so far [among potential investments],” he said.

One area that has him excited is voice over wireless, where Meru Networks, one of his investments plays.

“VoIP is pretty boring until you start talking about wireless,” he said.

The first wave of Wi-Fi equipment companies focused largely on security, leaving voice-over-Wi-Fi as a relatively uncrowded market, Quigley said. New cellular-Wi-Fi phones and dual-mode services in Asia indicate this market could be ready to take off, he added.

Service providers are another type of company Quigley said he is not overlooking. “The subscription revenue model is very attractive,” he said. He has seen his fair share of pitches from providers of Ethernet and other services, and has been impressed with newcomers such as Skype, but overall has found that it is tough for new service providers to differentiate themselves.

One area he said he is steering clear of is search, the hot market of the day.

“Too many people understand this technology and market now,” he said. “That’s not a good time to get in.”