Q:  What does Arista, Insieme & Vyatta have in common?

A:  Arista, Insieme & Vyatta not are primarily financed by traditional venture capitalists.

Q: Who's financing these companies?

Arista:  Founders:  Andy Bechtolsheim and David Cheriton
Insieme:  Cisco
Vyatta:  Andy Bechtolshiem (via his private venture capital company, HighBAR Partners)*

The trend toward the 'hot' networking sectors being financed outside of traditional venture capital did not start with Arista, Insieme & Vyatta.  A post from Bill Koss last fall discusses how big datacenter networking investments have been primarily driven by public companies (Juniper qFabric, Brocade's Fabric, etc), Cisco Spin-ins (Nuova, Andiamo), or privately funded (Arista).

On the opposite extreme -- look at the Network Access Control (NAC) market.  VC's poured significant money into NAC companies, like: Consentry, Caymas, Identity Engines, Mirage Networks, just to name a few -- with no return.  Only three NAC companies experienced positive acquisitions (Perfigo, Funk Software, and MeetingHouse**) with the biggest deal being ~$120M.  Of those, only Perfigo raised traditional Silicon Valley venture capital meaning out of all of NAC investments only one VC made a return.

What does this have to do with SDN?  Lots….

1. If venture capital is excluded from the biggest pots of networking gold (Ethernet Switching); and lose money on the table scraps (NAC) -- how many start ups will they really fund in network virtualization or SDN?  Most of the long-time networking VCs have made their SDN bets:  NEA, Lightspeed, and Norwest; and I expect we'll see investments being announced by Sequoia and Kleiner Perkins in the not too distant future.  Who's left from an investor standpoint? How much will they bet on SDN?
2. Cisco learned a long time ago how to freeze markets and make markets look unattractive to competitors and investors.  With Insieme, Cisco just put everyone on notice. The market has 12 - 18 months before Insieme FUD slows market adoption to a crawl.  This means that SDN challengers to Cisco MUST have a) a credible SDN solution, that b) solves a repeatable customer pain point; and c) have a distribution channel to sell the solution in 6-9 months in order to have an opportunity to drive market adoption before the Cisco / Insieme solution sees the light of day.
3. Cisco is notthe only company with a spin-in strategy.  Clearly, Arista is one.  While I don't have any inside knowledge of Arista plans, I suspect that it's only a matter of time (and maybe IPO) before Andy spin's Vyatta into Arista to become the Arista Security Services Software Module on their switching platform or use Vyatta to expand their software offerings for Cloud Service Providers.

My sense is it's a combination of these factors that make it hard to believe there will be a large number of SDN startups being funded.  This in turn, will make it challenging for companies without the resources (or resourcefulness) of Cisco and Arista to successfully navigate the SDN market to build $100M - $500M network virtualization / SDN business units.

As a result, smart networking companies will realize that to establish a meaningful SDN business  a) there will be limited inorganic options,  b) the inorganic options that do exist will either be expensive (lots of demand for small number of companies), or not desirable, and c) will decide it's less risky to experiment with alternative inorganic models to meet their SDN objectives and timeframes.

I bet we'll likely hear more alternative investment models, such as, corporate investments, spin-ins, and customer-financing in the network virtualization and SDN market.

What do you think?

Notes:

* Vyatta was originally a traditional VC funded company, though my understanding is the VCs were mostly wiped out with the last round of financing.   Even if they were not wiped out -- one look at the Vyatta board  and one can see it's effectively controlled by Andy's firm, HighBAR.
** Some say the Sygate acquisition by Symantec ~$150M was a NAC deal.  Not really, Sygate was a personal firewall company that masqueraded as a NAC company when the personal firewall market become embedded with AV

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