Dispatches from the heart of venture capital country

By Bob Brown
Network World Fusion, 06/30/99

Everyone knows you need to follow the money to get the real story, and we tried to do just that this week by visiting six top venture capital suppliers to the network industry.

As our quarterly venture capital surveys with PricewaterhouseCoopers have shown over the past couple of years, the amount of money being invested in network equipment, software and service companies is going up, up, up. Some start-ups are getting $30 million at a whack.

Here's a summary of our whirlwind tour of the venture community's famous Sand Hill Road in Menlo Park, Calif., and the surrounding area.

Monday, June 28, 8 a.m.

My colleague Jeff Caruso and I start the day with breakfast at Buck's, a quirky restaurant in Woodside, Calif. We are ushered right in - something I understand wouldn't happen if we were there on certain nights. Sitting beneath a mannequin wearing a cosmonaut spacesuit and holding a martini glass, we are joined shortly by Jon Feiber, who was employee Number 50 at Sun and now invests in companies for Mohr Davidow Ventures.

Jon has plenty to say on lots of topics. For instance, on the subject of Microsoft, he suggests that the company is getting off pretty easy. "It's like Microsoft is being charged with jaywalking despite having committed many heinous crimes," Jon says.

Turning to the main topic of the day - what are you investing in these days - Jon zeroes in on application service providers (ASP), a topic we'll end up discussing with every VC we meet.

He describes current ASPs, such as USinternetworking and Corio, as first-generation ASPs. He predicts that ASPs of the future will focus more on specific types of applications, rather than on more general database or enterprise resource planning applications. Examples of these applications will be virtual private networks, supply chain applications and "EDI on steroids."

The challenge for investors in ASPs is that service providers really need to scale their businesses to be effective. That means setting up data centers across wide geographic areas and connecting those centers with crash-proof networks, a prospect that requires a lot of cash up front. But in the end, Jon says the payoff will be large because these companies will keep getting paid for their services every month rather than getting a big lump sum for a software package.

9 a.m.

Next stop, Crosspoint Venture Partners, just a few blocks down the street. Rich Shapero, formerly president of Macintosh networking company TOPS (later bought and largely dissolved by Sun), joins us in a sparkling clean conference room inside Crosspoint's headquarters.

Rich couldn't be feeling much better. The company is an investor in Juniper and Ariba, both of which had huge IPO paydays the week before. But Rich's focus today is largely on the new breed of service providers, such as Covad, Digital Island and BlueStar.

Industry watchers who focus on what the traditional carriers like AT&T and PacBell are not doing, just don't get it, Rich says. He reels off numbers backing up his claims that companies like Covad are delivering all sorts of advanced services, such as digital subscriber line (DSL) offerings. Other investments, such as OnSite Access, are offering DSL services to multitenant buildings through DSL access multiplexers.

Despite the fact that the industry has been flooded with DSL service providers, Rich says it's way too early to start talking about consolidation. Besides, he says the companies' valuations are too high to make them affordable to most potential buyers.

The delivery of new broadband services will eventually make the ASP industry a reality, Rich says. When everyone's got 1M bit/sec connectivity, downloading applications from a service provider should be no problem. This, and not Internet access, is the true promise of DSL, he says.

Rich is the one investor we meet with who still gives new enterprise equipment suppliers a shot at survival. Given that his company is an investor in Foundry Networks, which is expected to go public later this year, Rich's enthusiasm isn't too shocking.

Rich takes his hat off to Cisco. He considers the company incredibly sharp given its size. He didn't have such nice things to say about some other industry giants, namely Lucent and Nortel Networks. Rich called them brain dead for their decisions not to get into the DSL equipment market to date, and praised Cisco for its acquisition of DSL player NetSpeed.

11 a.m.

Next stop: Venrock Associates, where we meet with Tony Sun, who has been with the company 20 years, and Eric Copeland, who has been with there less than a year.

Tony says the opportunity for new enterprise 'Net companies is pretty much zilch. "No one can attack Cisco because of its cash cow, the router market," Tony says. Venrock is investing much of its dough in equipment suppliers to the carriers and ISPs. Investments include Castle Networks, which got snapped up by Siemens, and ANDA Networks.

Tony and Eric are both hot on the ASP market, too. They highlight a company called AccessLine that offers a unified messaging service. The company has an interesting background: As Tony tells it, the company developed software and hardware that would enable the Bells to offer unified messaging services. When the Bells couldn't get their act together, the company got into the service provider business. Eric uses the service and swears by it.

Tony also warns not to overlook carriers like Alltel. While not as big as the AT&Ts and Bell Atlantics of the old world and not as jazzy as the Covads and Qwests of the new world, carriers like Alltel are fairly sizeable and have the potential to grab business away from the others by delivering multiservice applications.

1:30 p.m.

After stopping by a mall in the Stanford area for lunch, we drop in on Tom Dyal at Institutional Venture Partners (IVP). And this was a first for us: a press relations woman coordinated our meeting. That goes to show you the sort of high profile this firm has and wants to continue projecting.

Tom, who used to run the Bay Networks network management business, covers the gamut with us. IVP isn't looking to do too much investing in 'Net management software for enterprise networks, but Tom says there should be a big opportunity for management programs that will help carriers, ISPs and (what else?) ASPs to provision services, do billing and deliver on service-level agreements.

Speaking of ASPs, Tom is a big believer in them. He doesn't expect the largest organizations to ditch their enterprise applications and outsource them, but he does anticipate ASPs being very successful in getting business from small and midsize companies.

Other big areas of investment for IVP include carrier/ISP equipment and network processors. On the equipment side, IVP is looking now to help boost bandwidth in the metropolitan area. The goal is to help drive down WAN service prices, he says. One way this will happen, he says, is that the new gear will enable service providers to offer VPNs and other new services without having to put gear on customer sites. In other words, IVP is looking at companies that might help do away with the current concept of a managed network service, where the carrier might install a router or bandwidth manager on a customer site. Not having to install and monitor such devices on customer sites will save service providers money and let them offer services for less, Tom says.

3 p.m.

We zip over to the Palo Alto offices of Worldview Technology Partners next, fighting our first bit of traffic during the day. We whip through a quick meeting with John Boyle, formerly in business development at 3Com, and Mike Orsak, who has a financial background.

They shake us out of our ASP-induced haze by focusing the conversation on convergence, something we were surprised not to hear more about earlier in the day. Boyle admits he was initially skeptical about convergence given that a similar concept proved to be a bust in the mid-1980s. But with the emergence of the Web and other technologies, he is now a believer.

Boyle expects that convergence will happen first in the WAN. Once voice and data are running over the same wires into the enterprise, then companies will consider extending that convergence to the desktop, he says.

One reason Boyle thinks convergence will take off first in the WAN is that so many new broadband technologies are emerging there. These technologies, such as one called "invisible fiber" (Up to OC-12-speed wireless links), should be able to support all kinds of traffic, he says. "Anyone who thinks deregulation isn't working is nuts." Worldview is investing in equipment suppliers to new carriers as well as in new service providers.

4 p.m.

We wrap up the day by trekking back to Sand Hill Road to meet with Weiss, Peck and Greer's Barry Eggers, who used to handle acquisitions for Cisco. We actually wind up speaking with Barry via a conferencing system, but that's another story.

Barry, like the other investors, isn't too hot on the enterprise equipment market, though he identifies a couple of "pockets" of opportunity. The big one is storage-area networks, which need to be managed better and better integrated with existing LANs. "Management of these environments is a mess," he says.

There also appears to be a market for any-to-any connectivity within buildings. He says new products will adhere to emerging specifications such as Bluetooth and the IEEE 1394 FireWire standard, but declined to offer more specifics.

But the most interesting battles will likely be fought in the carrier market, Eggers says. The two worlds will collide in the form of Lucent and Cisco, which have strengths in the carrier and enterprise network markets, respectively. They will attack each other in different ways as each tries to muscle in on the other's turf.

Walking away from these meetings, it became clear that the venture community has largely turned away from the enterprise networking market and has conceded that most of it belongs to Cisco. The real growth is in building WAN infrastructure, and in creating services that can take advantage of that infrastructure. Start-ups that can do those things are the new darlings of the venture community, and as such they have a leg up on the future.