VCs Rue 10GbE Chip Bets

The Wall Street Journal ran a piece yesterday on the bath venture capitalists have taken on their investments in startup companies developing chips for 10-gigabit Ethernet (10GbE) networks.

Citing numbers from Venture Source, Scott Denne writes that VCs have put more than $800 million into 10GbE semiconductor vendors since 2001.

How’s that working out for them? Not so good, apparently. Venture-funded startups in the space, such as Neterion Inc. and NetXen Inc., have been sold in the past year for a fraction of the amount that had been pumped into them.

It’s easy to understand why 10GbE semiconductor firms can be had for garage-sale prices. To this point, the market signals haven’t been bullish. Consider, for example, that vendors of 10GbE networking gear — from Cisco to Juniper to 10GbE specialists such as Arista Networks — spent less than $130 million on the networking chips last year, according to Dell’Oro Group. The previous year, Dell’Oro estimates, less than $100 million had been spent on 10GbE semiconductors.

Yes, the market is experiencing year-on-year growth, but do the math: If more than $800 million has been funneled into investments in 10GbE chip startups and those companies have generated about $230 million in aggregate sales during their two best revenue years, we don’t require the services of a PhD in statistics to calculate that the valuations of those startups are under intense downward pressure.

As for why 10GbE chip startups have underperformed, the WSJ cites technological factors, such as challenges associating with suppressing power consumption, and market competition from semiconductor-industry stalwarts such as Intel and Broadcom. Those are factors, I’m sure.

Not mentioned in the article is, well, the economy. I think it’s the most salient factor in the retarded development of the 10GbE market. If you look at the value chain, it’s obvious that revenue realization must begin with customers willing to buy what’s being sold.

Now let’s follow this particular chain in reverse: the 10GbE chip purveyors depend on a robust demand from 10GbE networking vendors, who depend on strong demand from service providers and large corporate datacenters, who in turn depend on demand from their customers, who might rely on the healthy pocketbooks of consumers. As spending contracts, and less money enters the value chain, everybody suffers, including the VCs who funded the 10GbE chip vendors.

As nearly every shred of available evidence shows, the high-flying Internet economy of 2000 never regained its former glory after the bubble burst later that year. What’s more, for most of the past two years, we’ve had a very dysfunctional value chain in the 10GbE space, which is why this upgrade cycle for the latest and greatest iteration of Ethernet has not been as vigorous as its predecessors.

James Carville could explain what’s happened to the 10GbE chip startups: It’s the economy, stupid.

4 responses to “VCs Rue 10GbE Chip Bets

  1. Ouch. A few of these guys were also betting on the 10G NIC market as well – right? 10G NICs are only now starting to ramp up, but certainly don’t add enough revenue to the mix to move the needle that far.

    /Abner

    • Abner,

      You’re right on both counts. They were counting on the 10GbE NIC market, but it’s been a case of too little, too late.

      Don’t get me wrong: I think the 10GbE market will find its legs, just as 40GbE will ultimately follow it, but the adoption curve for this iteration of Ethernet has been slower, and in smaller increments, than for its predecessors.

  2. I agree that VC spent too much money into too many 10G chip companies but I do not see how it is different than many other markets in the post-bubble era. Entrepreneurs and VC often do not (can not) predict the right growth rates. At any rate, the 10G market IS growing very fast. How fast? Hard to tell but IMO it’s finally getting to where those VC wanted it to be 2-3 years ago🙂

    • Thanks, Sharon. I think you’re right about the 10-GbE market finally kicking into gear. The growth is belated, but at least it has arrived.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s