Category Archives: Venture Capital

What Intel Capital and Cisco Have in Common

What do Intel Capital and Cisco have in common?

Well, they probably have a few things in common, but something they definitely share is an interest in promoting and profiting from proliferation of the smart grid.

It’s an obvious connection.

Intel makes microprocessors, and it’s eager to get its chips into any IP-connected device that requires, or could benefit from, an electronic brain. Meanwhile, Cisco is the world’s leading purveyor of IP-based network infrastructure, including routers, switches, and wireless networks. Once all the embedded devices and end points on the smart grid have electronic brains, they’ll need to be networked to share and disseminate data.

Talking to Fortune’s Michael V. Copeland about Intel’s investments in companies that promote ubiquitous computing, Arvind Sodhani, Intel’s head venture capitalist, said the following:

“We benefit from growth in all those areas. Take clean tech and the electric grid. As the grid becomes more intelligent, more computing will go into things like household meters. We want to get our Atom processor into meters, and there are 120 million households in the United States alone.”

It makes sense. As conventional information technology (PCs, servers, enterprise networks, service-provider infrastructure, etc.) advances further into slow-growth maturity in the developed world, vendors such as Cisco and Intel will be seeking greener pastures in cleantech adjacencies.

Overview of Fortinet IPO

Proffering advice on whether others ought to buy into a company on its first day of public trading always is a tricky business. At any given moment, one has only limited visibility into the company’s prospects, the industry to which it belongs, and the health of the overall market. Things change — often with alarming speed.

It goes without saying that plenty of caveats, provisions, and reservations attend any recommendation. Still, I feel good about the immediate prospects of Fortinet, the unified threat management (ATM) security-appliance vendor that begins trading today under the “FTNT” symbol.

I don’t know whether the company will be successful in the longer-term against larger competitors such as Cisco, Juniper, and now HP (through its 3Com acquisition) as it attempts to take a bigger share of the high-end enterprise and service-provider market segments, but in the near term, it seems like an investment that can deliver some pop.

Fortinet makes appliances that integrate several security capabilities into a single box. Any customer that buys from Fortinet gets a security appliance that providse anti-spam, antivirus, firewall, VPN, IPS, and web filtering all in a single system. For the Fortinet customer, the value proposition is that a single appliance can deliver the security functionality of multiple point products, leading to savings in product-related security costs and in the ongoing management of devices and vendor relationships.

That said, the strength of a UTM appliance also is its weakness. I would not say that Fortinet is a jack of all trades and a master of none, but I would contend that many large enterprises might be inclined to select a best-of-breed application-security appliance over a broad-based UTM box.

As of now, according to information provided in the Fortinet prospectus, the company’s product sales are evenly divided between its low-end, midrange, and high-end models, with each product class accounting for about a third of sales. A perception lingers that UTM solutions sell mainly to small and midrange companies, and not to larger enterprises, and Fortinet cites that perception as a risk in its prospectus, particularly in light of its desire to get more business from high-end enterprise, government, and service-provider customers.

Unlike Cisco, Fortinent doesn’t have much in the way of a direct sales force. Its sales are made through its channel partners, comprising distributors, resellers, and some specialized integrators. That strategy covers a lot of ground and helps defray cost of sales, but it can also be a weakness in some large accounts.

Another potential weakness for Fortint is its reliance of open-source software for various facets of its security functionality. Fortinet argues that its “secret sauce,” if you will, is its FortiASIC hardware, which is optimized for accelerated processing of security and networking tasks. It also has its underlying FortiOS, an operating system that provides a foundation for application-security functionality.

Above those two technological cornerstones, however, one will find open-source software that Fortinet has licensed to provide disparate security functionality. With such code in play, there always is a danger, as Fortinet’s history attests, of patent-related litigation. Fortinet has been down that litigious road before, and it readily concedes that further courtroom drama could ensue.

Fortinet has has a lot of R&D in China, as well as in Canada (Vancouver), and in the USA. The China-based R&D will provide it with cost advantages over many competitors.

In the second quarter of 2009, market-researcher IDC said Fortinet had about 15.4 percent of the worldwide UTM market. According to IDC projections, the market will grow from $1.3 billion in 2007 to $3.5 billion in 2012, representing a compounded annual growth rate (CAGR) of 22.3 percent. In its prospectus, Fortinet said it has shipped more than 475,000 appliances to more than 5,000 channel partners and 75,000 customers worldwide — including more than 50 customers in the Fortune Global 100 — during the first nine months of 2009.

Regarding that latter point, my observation is that Fortinet would like deeper penetration in those high-end Fortune 500 accounts. Although it has cracked Fortune 500 companies, Fortinet’s account presence often is at a small number of branch offices rather than throughout the organizations. As much as it resists the notion, Fortinet probably would reluctantly concede that UTM products traditionally have enjoyed more success in SME accounts than in high-end enterprises.

Fortinet reported revenue of $123.5 million, $155.4 million, and $211.8 million for its fiscal years 2006, 2007, and 2008, respectively. It says it had revenue of $152.7 million and $181.4 million in the first nine months of fiscal 2008 and 2009, respectively. I regard as a strength the geographical diversification of Fortinet’s revenue mix. In first nine months of fiscal 2009, 37 percent of total revenue came from the Americas, 37 percent from Europe, and 26 percent from APAC. Since 2006, more than 60 percent of Fortinet’s revenue has been derived from outside the Americas.

For its size, the company has accrued a respectable amount of cash. Fortinet has generated positive cash flow from operations since 2005. Operational cash flow has grown from $3.4 million in fiscal 2005 to $37.7 million in fiscal 2008. During the first nine months of fiscal 2009, the company saw positive cash flow from operations of $45.8 million.

With the company’s revenue coming from product sales as well as from subscription-based services, the latter have provided a significant and growing source of recurring, high-margin revenue. That’s all good. As long as new customers are brought into the fold, subscription-based revenue will continue to proliferate and Fortinet will continue to generate meaningful operational cash flow.

Given the cash it is spinning and the proceeds it will derive from today’s IPO, Fortinet should be reasonably well placed to fortify itself, through acquisitions or other means. Although some factors are beyond its control, it is positioning itself strongly for the competitive struggles ahead.

The company has a good, battle-hardened management team. It’s a balanced group, with business and technological acumen. Fortinet also has been through some trials and tribulations. This isn’t a group of neophytes. The company has met adversity and endured.

Nothing lasts forever and nothing is a sure thing, but Fortinet comes into its IPO in good health, and with the near-term prospect of trading above its opening price range of $9 to $11 per share.

It now will sell 12.5 million shares instead of the originally planned 12 million shares.

Abundance and Variety in Defunct VC-Backed Companies

The list probably is not exhaustive, and the year isn’t finished, but the Wall Street Journal’s Venture Capital Dispatch is offering an ongoing inventory of venture-backed companies that have closed shop in 2009.

I tried to discern a pattern from the tombstone epitaphs in the venture-backed cemetery, but I couldn’t see one. Among the departed you’ll find late- and early-stage companies, firms involved in corporate and consumer technologies, biomedical and pharmaceutical concerns, and even a smattering of cleantech ventures.

You’ll find that many were backed by major VC firms, and some were financed by lesser-known players. The only underlying commonality is that all saw their funding dry up during a severe, and now apparently protracted, economic downturn.

Reviewing the Skype Deal

If the battle for Skype were a television series, it would have been equal parts soap opera and suspense thriller. It nearly segued into courtroom drama, but it wouldn’t have been a good one, likely way too one-sided for engrossing fare.

In the end, it was the specter of a courtroom rout that got the principals to the table to hammer out a settlement that leaves a few people happy, a few people content, and a few people disconsolate. There were winners, losers, and those who fall somewhere between those unambiguous extremes.

I think Om Malik has done an excellent job categorizing how the various players fared. His blunt assessment is keenly accurate, cutting through the cant and dishonest spin of those who would try to persuade us that we can trust neither our own lying eyes nor our critical faculties.

As far as the official breakdown, eBay finally gets to sell majority ownership of Skype to a consortium of investors, though the composition of those investors — and the overall percentage of the company they’ll take off eBay’s hands — has changed.

The key paragraph, excerpted from the press release announcing the settlement, is this one:

“As part of the settlement agreement, Joltid and Skype founders Niklas Zennström and Janus Friis will join the investor group, contributing Joltid software and making a significant capital investment in exchange for a 14 percent stake in Skype. As a result, Silver Lake and other investors including Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB), will together hold 56 percent of Skype and eBay will retain 30 percent. As previously announced, eBay will receive approximately $1.9 billion in cash upon the completion of the sale and a note from the buyer in the principal amount of $125 million. The deal, which values Skype at $2.75 billion and is not subject to a financing condition, is expected to close in the fourth quarter of 2009.”

In the original ill-fated arrangement, announced September 1, eBay sought to sell 65 percent of Skype to a consortium of investors that was led by Silver Lake. That consortium included Index Ventures but excluded Skype’s founders, Zennstrom and Friis, who — by the time this story runs its course — will have been both sellers and buyers of Skype in separate transactions with eBay.

Like the doomed proposal that preceded it, today’s announced agreement values Skype at about $2.75 billion.

Index Ventures and Mike Volpi, a partner in that firm, are not part of the deal. Index would like us to believe that this arrangement occurred entirely of its own volition, but the evidence suggests otherwise. Here is what Danny Rimer, a partner at Index Ventures, had to say about the Skype settlement:

“We are pleased that Skype will now be able to put litigation behind it, and we wish Josh Silverman, his team and the Skype investors well in continuing to grow a great business. Although Skype has the potential to be a great investment, the deal terms changed for Index such that it no longer matches our investment criteria and thus we have decided not to participate in the transaction.”

Om Malik contends rightly that this is . . . er, poppycock.

I don’t know whether Index could have said anything to take the sting out of the loss it sustained, on multiple fronts, in this whole Skype imbroglio. Nonetheless, the quote Rimer provides is embarrassing and ungracious. There are times when it’s best to say nothing, and this qualified as one of them.

It’s all over but the shouting now. With 23 directors, Skype might want to soundproof the boardroom.

Skype Settlement Said to be Imminent

Although a settlement seems to be in place — with Skype founders Niklas Zennstrom and Janus Friis receiving a 10-percent equity stake in Skype, plus two board seats, and with Index Ventures and Mike Volpi getting banished from the deal — a formal announcement including all the pertinent details has yet to be delivered by the legal gods to us mere mortals.

It shouldn’t be long, though.

Network World Reprises Volpi’s Medley of Email Hits

For those who cannot get enough of the intrigue, scheming, and shenanigans surrounding the boardroom-to-courtroom-to-boardoom battle for the ownership of Skype, Brad Reese at Network World reproduces a medley of Michael Volpi’s greatest email hits.

Thrill to Volpi’s message about “getting the father of SIP to jump ship” from Cisco. Enjoy his follow-up message to Egon Durban, managing director at private-equity firm Silver Lake, regarding the need to fill out a SIP engineering team with five or six solid VoIP software engineers. Marvel at Volpi’s disparagement of former colleagues and Skype-deal confederates.

Moreover, consider that he was writing all these email hits while still employed as the CEO of a company (Joost) that was founded and run by the same duo, Niklas Zennstrom and Janus Friis, who founded Skype before selling it to eBay and who entertained hopes of owning it again. Also ponder that much of the same underlying p2p software used at Joost, at least originally, also served as the architectural foundation for Skype.

Finally, consider that Volpi was said to have led and been involved in an architectural transition at Joost that saw the video-sharing site move from the p2p foundations on which it was based — using the same Joltid technology that was licensed by Skype — to a client-server architecture that employed Flash-based web clients at the end points.

At minimum, there would appear to be superficial similarities between the architectural overhaul that had occurred at Joost and what Volpi proposed for Skype.

Reputation Bashing in Joltid-Volpi Brouhaha?

In a short piece summarizing and commenting on the latest developments pointing toward a settlement of the legal conflicts and ownership of Skype, All Things Digital’s Kara Swisher opines as follows:

Skype founders Niklas Zennström and Janus Friis had sued Index and also partner Michelangelo Volpi via tech companies they control, Joltid and Joost.

The pair had already been in a legal battle over software licensing issues with eBay (EBAY), the company that had sold Skype to in 2005.

They then accused Index and Volpi, employing a reputation-bashing style, of using confidential information as part of a consortium bid to acquire a large chunk of Skype.

Well, did Zennstrom and Friis use “a reputation-bashing style” in their litigious cage match with Mike Volpi? I suppose that’s one interpretation of what occurred, but it’s not the only one.

For the record, I read Volpi’s email correspondence, written while he was CEO of Joost, adumbrating his plan to take control of Skype and perhaps serve as chairman of that company. I am not a lawyer, and I am not crazy enough to pass legal judgment on what Volpi said and did while sitting in the big chair at Joost, but it seems to me at least some of his behavior, in that role, was ill-advised and ethically questionable.

I am not the first, nor the last, to reach that determination.

In closing, I’ll just say that even though one’s reputation can be bashed, if one’s integrity is as adamant and unyielding as aggregated diamond nanorods, the bashing will do neither significant nor lasting damage. Conversely, if one is not quite an impregnable ethical fortress, the bashing of one’s reputation can do serious harm.

Reported Skype Settlement Sees Founders Taking Ownership Stake; Index Ventures Out

The battle between the founders of Skype, its current owners (eBay), and others who wish to own it will reportedly reach its end in a negotiated agreement.

So says the New York Times. Before the Times published its report, Om Malik also reported that a settlement might be in the works.

Several people briefed on the situation told the Times that the proposed settlement will be struck between a consortium of investors, who successfully bid for Skype in September, and the original founders of Skype — Niklas Zennstrom and Janus Friis — who filed a fusillade of lawsuits in an effort to derail the consortium’s $1.9-billion deal to buy 65 percent of Skype from eBay.

The settlement mooted by the Times’ sources would restructure the consortium buying Skype, with Zennstrom and Friis, who created Skype and sold it to eBay in 2005, taking a significant interest in the p2p communication company they founded. (Back in September, I wrote about a potential settlement along these very lines.)

Apparently withdrawing from the deal — doubtless at the strong insistence of Zennstrom and Friis — will be Index Ventures, a London-based venture capital firm whose partner, Mike Volpi, formerly served as CEO and chairman of Joost, a video-sharing firm also founded by Zennstrom and Friis.

This is where the tale gets tangled and sordid, and where it requires some expository backtracking.

A phalanx of intellectual-property disputes and lawsuits relating to software technology licensed to Skype by Joltid — a company controlled, again, by Zennstrom and Friis — was designed to prevent eBay from completing the $1.9-billion sale of a 65-percent interest in Skype to a group of investors that includes Index Ventures, private-equity firm Silver Lake, venture-capital firm Andreessen Horowitz, and the Canada Pension Plan Investment Board.

But there’s an additional subtext to this byzantine story. It involves Volpi, a former Cisco executive who was involved in a great many of the networking giant’s acquisitions through the late 90s and into the current decade. In 2007, Volpi left Cisco to take the helm at Joost, a video-sharing business built atop some of the same software technology that provided the p2p architectural foundations for Skype and Zennstrom and Friis’ earlier companies, including file-sharing trailblazer Kazaa.

What transpired at Joost is key to understanding the intense antagonism between the principals involved in the fight for Skype.

At some point, as Joost struggled to gain ground against established video-distribution websites, Volpi turned his attention to Skype. In February of this year, while he was serving as CEO and chairman of Joost, Volpi began email correspondence with Danny Rimer of Index Ventures — the VC firm Volpi would later join — regarding a scheme to take control of Skype in conjunction with private-equity firm SIlver Lake and others. To make matters worse, Volpi wrote the correspondence using his email account at Joost.

In a motion for a preliminary injunction as well as in a preceding lawsuit, Jotid and Joost accused Volpi of a veritable panoply of chicanery and outright malfeasance. Regarding the investment-consortium’s bid to take majority control of Skype, the plaintiffs charged that “the entire transaction is . . . . infected with Volpi’s misconduct.”

With Volpi having used his Joost account for email correspondence regarding Skype, the Joost and Joltid plaintiffs produced Volpi’s email messages and other documentation to support their injunction demands.

Not only did Volpi discuss a Skype takeover with his future colleague at Index Ventures while he was still at Joost, but Volpi also made critical, even disparaging, comments about prospective deal partners (including former Cisco colleague Charlie Giancarlo) and about his employers, Zennstrom and Friis.

Regarding Giancarlo, Volpi wrote:

“Charlie is a good guy, but not a superstar . . . . His core asset at Cisco is (sic) that he was much more inclined to say “yes” to John (Chambers, Cisco’s CEO) than I was.”

In those email messages, Volpi also discussed how Skype could change its underlying software architecture to obviate the intellectual-property claims related to Joltid and its p2p software.

The entire saga may have done irreparable damage to Volpi’s previously stellar professional reputation. In a column published originally on October 31, the San Jose Mercury News’ Chris O’Brien wrote:

Even if we give Volpi the benefit of the doubt and assume he prevails on the legal issues, his actions and behavior are likely to put a considerable dent in his reputation. It may be hard to predict who will be the winner in these legal cases, but it’s clear that Volpi is the early loser.

If the New York Times report proves accurate, the epilogue of this story will be worth following.

Fortinet IPO All Set to Go

With the price range and size of Fortinet’s initial public offering (IPO) all set, we now await the first trades, which almost certainly will occur before U.S. Thanksgiving. At least some of the smart money believes Fortinet will be trading under its “FTNT” symbol in a little more than two weeks.

Fortinet expects to sell 12 million shares for between $9 and $11 apiece. Based on a midpoint price of $10, the IPO is expected to raise $120 million, according to a Reuters report.

Of the shares reaching market, about 52 percent are being sold by the Silicon Valley firm’s financial backers, leaving Fortinet with expected net proceeds of approximately $52.4 million. The company’s executives and directors own 59 percent of the company, while venture-capital firm Redpoint Ventures owns 15.2 percent and Meritech Capital holds 10.8 percent, according to the prospectus. Other investors include Acorn Campus Ventures, Defta Partners, DCM, and WI Harper Group.

The Deal.com reports that Fortinet raised more than $93 million in aggregate VC funding, whereas PEHub says the company has raised $83 million in VC funding since 2002.

Morgan Stanley, J.P. Morgan, and Deutsche Bank Securities are serving as co-lead underwriters; they will be given the option of purchasing an additional 1.8 million shares.

Microsoft Acquires Opalis for $59 Million

Following up on news first reported by Brenon Daly of The 451 Group, sources say that Microsoft has acquired Toronto-based Opalis for approximately $59 million.

Opalis provides single-console process-automation (also known as run-book automation) software that orchestrates and automates IT processes such as incident, problem, configuration, and change management across IT infrastructure.

The company, which deems itself the “privately held market leader in IT process automation,” announced earlier this month that it had achieved its best-ever quarterly license revenue, with new license bookings growing 104% compared to results in the same period last year.

Daly reports that Opalis was running at about $10 million in annual revenue. It had raised approximately $25 million in venture capital from backers that included Sierra Ventures, VenGrowth, BDC Venture Capital, and Roynat Capital.

Joltid Versus Volpi: The Antagonism Intensifies

The high-stakes battle for Skype already was contentious, even bitter.

It became poisonous today when companies controlled by Niklas Zennstrom and Janus Friis filed a motion for a preliminary injunction against Michael Volpi and venture-capital firm Index Ventures in the United States District Court for the District of Delaware.

In the motion and accompanying supporting documentation — filed by Joost US, Inc., its indirect parent company Joost N.V., and Joltid Limited — Volpi, formerly the CEO and chairman of video-sharing company Jooost, and Index are accused of a veritable panoply of chicanery and outright malfeasance. Many of the allegations are nothing short of incendiary.

Flowing from intellectual-property disputes and lawsuits relating to Joltid software technology, the motion is intended to prevent eBay from completing the $1.9-billion sale of a 65-percent interest in Skype to a group of investors that includes Index Ventures, private-equity firm Silver Lake, venture-capital firm Andreessen Horowitz, and the Canada Pension Plan Investment Board.

Zennstrom and Friis would like to own Skype, in whole or in part, and they’re desperate to stop eBay’s Skype deal from coming to fruition.

A press release announcing the preliminary-injunction motion spells out the plaintiffs’ immediate objectives:

The Motion for Preliminary Injunction asks the Court to enjoin Index and Volpi from using any of Joost’s and Joltid’s confidential information regarding (among other things) the Global Index Software, the technology developed and owned by Joltid that provides the peer-to-peer capability embedded in the Skype program. The Motion also asks the Court to enjoin the defendants from:

(i) using the confidential information in connection with the operation or strategic planning of Skype;

(ii) communicating such information to other parties in the “Buyout Group” that has made a bid to acquire Skype from eBayInc.;

(iii) soliciting employees of Joost and Joltid with offers to join Skype;

(iv) having communications with current or former employees of Joost orJoltid regarding the companies’ confidential information; and

(v) further participating in the Skype acquisition or assuming any position with Skype until a final adjudication of the merits of the case.

Citing allegations made against Volpi and Index Ventures in a lawsuit filed on September 19, the filing flatly asserts that “the entire transaction is . . . . infected with Volpi’s misconduct.”

Those who haven’t been following this complex and personally fraught conflict can be forgiven for not understanding the complicated drama without the benefit of an annotated program. As I attempted to explain in an earlier post, the allegations are centered on former Cisco wheeler-dealer Volpi’s tenure as CEO and chairman of Joost, a company founded by Zennstrom and Friis.

Like other companies – such as Kazaa and Skype – launched by Zennstrom and Friis, Joost leveraged and licensed underlying peer-to-peer software code from subsidiary companies (including Joltid) also owned by Zennstrom and Friis.

In 2008, during Volpi’s unsuccessful reign at Joost, he is reputed to have led an effort to shift the company’s client-based software and p2p architecture – based on Joltid’s Global Index (GI) software, which also provides the underpinnings for Skype — to a web-based model with a centralized server-based architecture. Although he cited business and technological reasons for the move, Zennstrom and Friis contend skullduggery was afoot.

Essentially, the plaintiffs assert, Volpi used inside knowledge of how Global Index and other Joltid software worked to help Skype violate terms of an executable-license agreement it had struck with Joltid for use of the General Index software. Unlike Skye, Joost had a license for the source code.

Meanwhile, Joost’s fortunes were waning while Skype remained popular with millions worldwide as a means of conducting presence-based voice, IM, and video communications.

At some point, in early 2009, while he still was the CEO of Joost, Volpi is accused of conspiring with his colleagues at Index Ventures on a plan to gain a controlling interest in Skype, partly through his knowledge of how Joltid’s General Index functioned. The plaintiffs allege that Volpi, trading on confidential technical information he obtained at Joost, made himself indispensable to the “buyout group,” and that he subsequently met with senior executives at Skype to discuss technical workarounds that would extricate that company from its lawsuits with Joltid over use of General Index code.

Volpi is also alleged to have attempted to poach employees at Joost who had intimate knowledge of how the disputed p2p software worked.

A welter of email correspondence and other documentation has been adduced by the plaintiffs to support their case for an injunction. Some of those background documents make for fascinating reading, particularly Volpi’s email correspondence relating to the structure of the Skype deal.

I might revisit some of that content in future missives. Suffice it to say, Volpi’s remark about Charlie Giancarlo – now with Silver Lake Partners, but formerly an executive counterpart of Volpi’s at Cisco – will raise eyebrows.

Said Volpi of Giancarlo: “Charlie is a good guy, but not a superstar . . . . His core asset at Cisco is (sic) that he was much more inclined to say “yes” to John (Chambers, Cisco’s CEO) than I was.”

Sophos Ponders NASDAQ Listing in 2010

Sophos, the UK-based security-software company, is preparing for a market flotation on NASDAQ in 2010, according to a report that first appeared in the Sunday Times.

The public offering would peg the company’s value at up to $1 billion, according to the report.

The company is 60-percent owned by Oxford University scientists Jan Hruska and Peter Lammer, who founded the business in 1985. A further 20 percent is owned by venture-capital group TA Associates, with 10 percent held by Investcorp, and the remainder held by founders and management.

A well-respected Internet-security vendor involved in a number of industry associations, Sophos has several technology partnerships with major players such as IBM, HP, Cisco, Sun Microsystems, Citrix, and Novell, among others.

Advised by Deutsche Bank, Sophos is said not to have made a decision on the timing of the offering.