Since Boston venture capitalists have been investing in enterprise start-ups for decades, they are going to face more competition. Meanwhile, a handful of VCs are watching the success of Plexxi, which makes a switch that cuts by a factor of five the cost of building and running a corporate data center.
Since it's taking business from Cisco Systems, the question that comes to my mind is whether Cisco will do what it has done in the past when faced with an upstart -- acquire Plexxi.
Before taking a look at why Plexxi is doing so well, it's worth noting the profound shift in investing from social media to enterprise start-ups. According to CB Insights, Internet venture capital investments in social media start-ups peaked at 21% in 2011 and it's now down to 2%. Anand Sanwal, founder of CB Insights, told BusinessWeek, "Big data and cloud companies are grabbing the imaginations of venture capitalists."
Plexxi certainly fits within the enterprise sector and one of its investors, North Bridge Venture Partners' Jamie Goldstein -- an MIT and Harvard Business School graduate -- characterized its product in a July 17 interview as one whose "return on investment can be written on one piece of paper."
To understand why Goldstein believes that Plexxi's technology cuts the cost of building and operating a corporate data center "by a factor of five," it helps to understand how that technology works.
As Goldstein explained, corporate data centers that do not use Plexxi, consist of clusters of servers -- they look like PCs -- and the data flowing in and out of the data centers is directed using switches -- Cisco's Catalyst 6500 models are quite common.
But there are so many switches within corporate data networks that the switches need their own switches. And those switches communicate through a hierarchy that looks like a pyramid. For a signal to travel from its source to its destination, it must go through each layer -- from the bottom to the top and back down again.
Not only does this slow down data storage and retrieval, it also requires a significant amount of time by data center engineers who have to tweak the settings on each switch by hand. And as a company's customer needs and product lines change, this architecture makes it expensive and time-consuming to adapt a company's data storage to changes in its business.
But Goldstein argues that Plexxi's approach is far more efficient. "Plexxi lets the servers talk to each other without all those switches. It installs a ring of different colored glass fibers -- like the one surrounding Waltham where I am sitting now -- within a data center that connects all the servers. I can talk to Jim on a blue fiber and Peter on a red one," said Goldstein.
At the heart of Plexxi's technology is the ability to switch light pulses very efficiently. "Plexxi takes advantage of lower costs and improved reliability by makers of optical switches that first got started directing light through big fiber optic telecommunications networks in the 1990s. And Plexxi's third-generation switch makes it easy for a company to change these communications pathways as it adapts its business," explained Goldstein.
The brains behind this architecture is David Husak, a 1984 MIT graduate who is Plexxi's founder and CEO. As Husak said in a July 15 interview, "I sold my first start-up, Synernetics, to 3Com for $104 million in January 1994 and my second one, C-Port, to Motorola for $430 million in February 2000. But Reva Systems, a Radio Frequency Identification (RFID) networking company, shut down in the 2008 financial crisis after its $12 million pipeline evaporated."
Plexxi is going after a big, fast-growing market that it calls Software-Defined Networking (SDN). In 2012, customers bought $252 million worth of SDN gear -- but by 2018, the market should hit $35 billion, according to a study by Plexxi, SDN Central, and Lightspeed Ventures, a 128% compound annual growth rate.
Plexxi has raised a total of $48.5 million -- $8.5 million in January 2011, another $20 million in May 2011, and $20 million more in April 2012. It employs 71 people -- "mostly engineers working on Plexxi's hardware in Nashua, New Hampshire -- with some software engineers in Kendall Square," according to Husak.
Cisco is not taking the threat from Plexxi lying down. "Plexxi wins business by telling network managers, chief information officers, and CFOs that it cuts the cost of building and operating corporate data networks by a factor of five and helps companies respond to changing customer needs. Cisco counters by sowing the seeds of fear, uncertainty, and doubt about buying from a start-up that could go out of business," explained Goldstein.
But Cisco's argument is not that effective. As Goldstein argued, "After 15 years without a change, companies are looking for something new. And Plexxi gives those customers a low risk way to try out the technology -- and makes it easy for them to adopt it more widely when they see the positive results."
Given Husak's history of starting and selling companies, I would not be surprised if Cisco buys Plexxi.
