About a year and a half ago, it seemed as if software-defined wide area networking (SD-WAN) startups were just in their infancy, and it was too soon to think about consolidation. But since then, Cisco has purchased Viptela for $610 million. And VMware has purchased VeloCloud for an undisclosed amount.
These acquisitions have people wondering which vendor will get purchased next and how much money might it garner.
Valuation of startups is completely different than valuation of established companies, according to Paul Weinstein, CEO of the Paul V. Weinstein Technology Focused Investment Bank & Advisory Firm. Established companies have all kinds of metrics such as revenue figures for a substantial period of time, earnings figures, and customers. For established companies, “That’s how the value is defined,” said Weinstein. “It’s all about growth, earnings, revenue. The startup world is completely different. There’s nothing to go on.”
Surprisingly, the amount of money that a startup might command is directly correlated to how much of a shopping frenzy that startup is able to create.
“Supply and demand is what drives price,” said Weinstein. “Probably the most important thing is the competitive aspect. If it’s a really hot startup, you as a venture guy are competing with other venture firms. You want to win the deal. You compete on your reputation and how much you’ll say the company’s worth, early on, when there’s not a lot of evidence.”
Of course investors use every scrap of information that they do have. They look at the founders and the team at the startup. They analyze the technology. And they make projections about its growth and whether it’s a market disruptor.
From the startup’s perspective, it helps if its CEO is also a master salesperson. It takes more than one suitor vying for the startup to drive up the price. If there’s no competition, a single suitor will probably value the startup quite low. “It’s only that competition that drives up the price,” said Weinstein. “Even if you knew the technology was flawless, still, if you’re the only investor you’ll set the price low.”
The SD-WAN Field
IHS Markit tracks the SD-WAN vendors and estimates their quarterly revenues. Its most recent numbers, for the third quarter of 2017, position Silver Peak and Aryaka as emerging leaders in the space. According to IHS Markit, for Q3 of 2017, SD-WAN appliance and software revenue reached $116 million, up 2.8 times year-over-year.
Of the $610 million Cisco paid for Viptela, IHS analyst Cliff Grossner said, “I think it was a good deal for Cisco. I was surprised that Viptela sold out so soon since Viptela was leading at the time that Cisco bought them.”
But timing is an important factor, as well.
There’s a well-known phenomenon known as “the hype cycle.” The cycle begins when a new technology triggers a lot of publicity. The hype grows quickly if the technology produces a number of success stories. This phase culminates in the “peak of inflated expectations.” But then, inevitably, the hype collapses into a “trough of disillusionment.”
“There’s always a bit of hype when a company signs a big service provider,” said Grossner. And SD-WAN startups have been announcing service provider customers in droves. Versa Networks recently announced wins with KDDI and Zayo Group. Silver Peak touted a win with China Telecom and a collaboration with Fujitsu to sell to service providers. Talari said it’s moving to a 100 percent channel model to sell to managed service providers and value-added resellers.
There are so many SD-WAN announcements of service provider wins that it’s all getting pedestrian. And Grossner points out that winning a contract with a service provider is just the first step in a process that could take up to two years before significant revenue comes in. “There’s a lot of hype about instant revenue,” he said, “But there’s a lot of inertia. It doesn’t guarantee huge money down the road either.”
In terms of valuation, when startups start winning big customers, Weinstein said, “It goes from hope, to real products with real problems. As an acquirer, instead of worrying about hype, you start asking questions like how do customers like the product? Doubt creeps in.”
He said startups that want to find a buyer should take advantage of the hype cycle. Asked where he thought SD-WAN was in terms of the hype cycle, Weinstein said, “I think it’s entering into that trough of disillusionment curve.”