VCs fund 'Net infrastructure

Enterprise Networking Systems, Evoke and Corvis among big money winners.

By CAROLYN DUFFY MARSAN
Network World, 02/21/00

Flush with cash, venture capitalists are pouring money into start-ups developing products and services that bolster the Internet's infrastructure.

While business-to-consumer and business-to-business e-commerce Web sites still get the most money, areas of investment that are growing include network service providers, consulting firms and equipment manufacturers, according to the latest PricewaterhouseCoopers/Network World Venture Capital Survey.

"Anything that gives me a bigger, faster pipe into the Internet is getting funded,'' says Kirk Walden, national director of venture capital research for PricewaterhouseCoopers.

Venture capital database
Search through more than two years' of data from the survey in a variety of ways.

Altogether, Internet-related investments increased nearly six-fold from $3.4 billion in 1998 to $19.9 billion in 1999, according to PricewaterhouseCoopers, which conducts a quarterly survey of all venture capital investments and breaks out data on the network industry for Network World readers. Increasingly, the money is going into behind-the-scenes network technologies and services that keep dot-com businesses online.

"The next series of big valuations is going to be for the infrastructure players,'' predicts Chris Williams, chief marketing officer at Enterprise Networking Systems (ENS), a Redwood City, Calif.-based consulting firm that benefited from this trend with a $90 million cash infusion last quarter. Infrastructure spending "is an opportunity that is so large it's almost hard to quantify,'' Williams says.

For corporate network managers, investments in the Internet infrastructure mean access to new and innovative services rolling out later this year.

"Corporate network managers should be able to get new services faster than ever before,'' says Glenn Falcao, executive vice president of Corvis, a Columbia, Md., provider of optical switches and backbone equipment. "They should have the opportunity to have more control over their networks...and they should eventually see lower costs.''

Three companies that highlight this trend are ENS, Evoke and Corvis. All three companies received large venture capital investments last quarter, and each is representative of companies in its field also getting funding.

ENS - a network infrastructure specialist

Ten-year-old ENS reinvented itself as a network infrastructure specialist last year. The firm sold off its systems integration and reseller businesses to concentrate on providing companies with assistance in designing networks that are robust enough to support mission-critical e-business applications. Customers range from Kaiser Permanente to wine.com.

"The new business models that companies are rushing to adopt are so networking-centric that there's a need in the market to help architect these networks,'' Williams says. "Three or four years ago, the Web was a passive tool. Companies just put their brochures up. Today, the business models have evolved to where the business itself is being conducted online, and the definition of a user is now anybody with a browser. The network has become so tightly integrated with the business that it can't be separated out.''

The investment community is embracing ENS' strategy. The company raised a total of $103 million last year from Cisco Systems, Benchmark Capital and Trinity Ventures. The company used the money to recruit a new executive team, increase staff from 100 people in August to almost 600 today, and open an office in Europe.

"The landscape is full of e-business service firms that do not have the networking skill sets that we offer,'' Williams says. "Our funding really represents the tremendous opportunity in equating the business mandate with the network infrastructure that has to be built.''

ENS may be the largest and most visible player in this area of consulting, but it certainly isn't the only one.

"There's an explosion in growth around networking services and integrators,'' says Steve Meisel, global practice leader of PricewaterhouseCooper's Computers and Networking Practice. "These are companies that provide almost pure consulting...We've seen a couple of them going public, which is spawning investments in start-ups.''

Evoke - a new kind of service provider

Another hot area for investment is network service providers including ISPs and ASPs that sell Internet-based services to large corporations. One such player is Evoke, a Louisville, Colo.,provider of Internet conferencing services that attracted $100 million for its third round of financing last quarter from GE Capital Equity Group, Softbank Technology Ventures, Centennial Funds and others.

Formerly named V-Stream, Evoke offers Internet-based communication and collaboration services that replace traditional telephone and video conferencing. Cisco uses Evoke's streaming video services to provide training to its resellers, while Wells Fargo has replaced its audio conferencing with Evoke's Web-centric offerings.

"Our goal is to make it simple and easy for users to get on to the 'Net and start communicating with tools they didn't have in the past,'' says CEO and co-founder Paul Berberian. "We've developed a tremendous amount of software to integrate communications over the telephone and the Web.''

Evoke is using the venture capital funding it has raised to build two data centers in the U.S. with state-of-the-art telephony and Internet equipment. The company will set up a center in France later this year.

"The money invested in us allows us to set up our network fast, but it also allows us to do it right,'' Berberian says. "If we're going to convince corporations to embrace the Internet as a critical communications tool in the same category as the telephone, we need to give them a robust platform.''

To build these platforms, network service providers need next-generation equipment and components. That's why venture capitalists are ratcheting up their investments in these types of manufacturers, particularly in the area of optical networking.

"I'm incredibly excited about optical networking. I think it's the foundation of the new economy,'' says Judy Horton, director of research at VMS, Inc., which operates as AT&T Ventures. "It's amazing how much money was raised in that sector over the last year.''

The biggest optical network deal of last quarter was $213.4 million raised by Corvis, The brainchild of Ciena co-founder David Huber, Corvis has been chosen by carriers Williams Communications and Broadwing to provide optical network gear. The latest round of funding - which brings Corvis' total war chest up to $300 million - allows the company to gear up its manufacturing capability.

"It's all about being fast,'' Falcao says. "The reason we're getting the money is that the venture capital community wants us to deliver the equipment first and get market share.''

Falcao says Corvis has gotten so much money from such firms as Integral Capital Partners, Worldview Technology Partners and Meritech because it has a breakthrough product in a strategic market.

"There's recognition that these dot coms are changing the economic model and the business model. For them to be successful, they have to be underlaid by an infrastructure. And that infrastructure has to be invested in,'' Falcao says. "That's why Corvis and some of the other component companies are now going to be hot properties.''