The End of Infrastructure Start-Ups

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(T) As reported by Light Reading recently, Avici Systems became the last vendor to exit the Internet core routing market. Before Avici, Caspian Networks, Pluris, Chiaro Networks, Hyperchip, Axiowave, and Ironbridge exited the market while Procket Networks assets were acquired by Cisco Systems, Vivaci Networks was acquired by Tellabs and TiMetra by Alcatel.

Billions have been invested by VCs in routing start-ups in the hope of creating another Juniper Networks competing against Cisco Systems.

The fact that a successful start-up like Avici cannot compete anymore against Cisco and Juniper is a clear signal that little funding will certainly be allocated to infrastructure start-ups at least in the soon future.

This signal is certainly amplified by a number of market dynamics.

The “Big IT Infrastructure Providers” of the 80s and 90s have still a hard time to find new areas of growth for their shareholders.

Microsoft is seriously challenged by Google and cannot find revenues growth. Intel is in a technology and price war with AMD although less challenged than Microsoft.

Oracle is buying any significant enterprise software vendor to increase its revenues and so far that strategy has worked well for Oracle’s shareholders.

Cisco is moving to unified communications buying WebEx for $3.2 billion (and as a result Cisco which was already competing with Microsoft is now competing with Google).

And, IBM now more a service company than an infrastructure IT supplier is losing its spot of “number 1” high-tech company by its revenues to HP which is pursuing an aggressive re-engineering of its operations under the leadership of its new CEO, Mark Hurd. And, that strategy has worked well for HP’s shareholders.

So none of the large infrastructure providers of the 80s and 90s is finding a new area of infrastructure growth.

This fact can be contrasted to the present come back of “the dot-com” except that now they are sometime called Web 2.0.

After the NASDAQ implosion from 5,000 to 2,000 and the burst of the telecom and dot.com excessive valuations, enterprise software and information security were the major sources of capital investments for new start-ups.

But since Google IPO in 2004, it seems that nobody is starting and/or investing any more in networking, software, and security. However, everybody seems to be willing to start and/or invest in a new Web 2.0 with the possibility to be acquired by Google or Yahoo.

But even investments in Web 2.0 IT are not anymore the first preferred option for venture investing. After having moved from high-tech to bio-tech, and from bio-tech to China, new capital is now moving from China to clean-tech as the top favorite investment spot.

The Mercury News in its business section from May 13, 2007, selected the top 5 VCs under 40. What is interesting is the similarities between the 5 VCs. All of them works in management consulting and finance after business schools and only one has some significant operational experience. And, all of them is/ has investing/ed “only” in dot.com/Web 2.0. So, it is unlikely that any of those new John Doerr or Don Valentine will ever invest in a new infrastructure start-up.

So except if a significant new disruptive technology comes up soon such as the invention of Java, a new way to switch packets or a new type of browser, very few infrastructure start-ups will be funded and the industry will further consolidate.

Avici is not the last one!

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Categories: Networking, Startups