Cisco acquires a bargain startup for $610 million

Cisco Chuck Robbins5Cisco CEO Chuck Robbins.Cisco Live/Business Insider

Cisco did some bargain shopping this week when it acquired a startup called Viptela for $610 million on Monday.

A year ago, Viptela was valued at $900 million by its investors, according to the database PitchBook.

The startup had raised over $108 million in venture funding from venture capitalists like Sequoia, and it achieved that valuation when it raised $75 million in May 2016, led by Redline Capital Management, a European and Russian VC.

The sudden sale of such a hot startup — and the discount price — has not gone unnoticed among Silicon Valley VCs and tech industry insiders trying to gauge the health of the enterprise startup scene.

Two people close to the company described a promising business with decent sales but a variety of problems that opened the door for Cisco to walk in and snatch it at a bargain price.

“There was internal dysfunction and investor dysfunction,” one person told us.

Founders and investors made millions

Viptela offers a way for companies to connect remote offices to their corporate networks using Viptela’s router and software hosted in the cloud. It was considered a market leader in a new area called software-defined wide area networking, a new way to build networks that relies on software to do fancy control functions.

According to one source inside the company, the board sold the company on the cheap mostly because making sales in its niche of wide area networking was hard, competition was rising, and the cofounders were running out of steam to build it into a long-term independent company. The founders wanted to see the technology be successful, and it might have a better shot at thriving in Cisco.

Meanwhile, Cisco’s offer was enough for the cofounders to walk with multiple millions and for investors to make money, even late-stage ones. They had a clause in their agreement that protected them if the company sold for less than their valuation. All the investors made money, both sources said.

“The only people to get screwed were the employees who joined in last year,” one person told us. “Everyone that came on near their unicorn-level valuation, they got caught.”

This is, however, a typical risk for employees who join a more established startup. They typically get less equity, and there’s more of a chance their stock won’t be worth much if the company’s value drops.

Viptela teamThe Viptela founding team signs their series A term sheet at Sequoia in 2012. From left: Atif Khan, Venu Hemige, Khalid Raza, Amir Khan, Ramesh Prabagaran.Sequoia

Not a Trojan horse for Cisco

Viptela was a startup founded by a team of accomplished engineers from Cisco, Juniper Networks, and Alcatel-Lucent that had been turning heads in its niche.

Rumors had been swirling for at least a couple of days that this deal was in the works.

Interestingly, four months ago, Viptela hired a new CEO, Praveen Akkiraju. He was famous in his circle as a longtime Cisco engineer who became the CEO of a contentious joint venture between Cisco and EMC known as VCE.

When the relationship between Cisco, EMC, and VMware devolved, EMC bought out Cisco’s interest in VCE. But Cisco retained a 10% stake and it got to make its guy, Akkiraju, the CEO.

After Dell swallowed EMC, including VCE, Akkiraju was basically out of a job. He landed at Viptela in January.

There’s a rumor he was brought in just to orchestrate a sale to Cisco, but both people we talked to told us this wasn’t the case. At the time he was hired, he was expected to be a longtime CEO.

Praveen Akkiraju

One person told us that the real reason for the change was fracturing inside the company that would have been a lot for him, an outsider, to fix.

The two cofounders were having disagreements, sources told us. On one side was Khalid Raza, the founding CTO. On the other was Amir Khan, the founding CEO, who became president after Akkiraju joined, and his brother Atif, who was running the sales engineering department.

Meanwhile, the company’s key investor and board member was Michael Goguen, a partner at Sequoia who had funded the first two rounds of the company — about $33 million. But in March 2016, Sequoia fired him after a lawsuit alleging sexual abuse was filed against him, it said. He gave up all his board seats, CNBC reported.

New threats

Viptela wasn’t failing. It had landed 25 Fortune 500 enterprises as customers and made deals with carriers like Verizon and Singtel that used its product to sell cloud networking products to other big companies, it said.

One person told us Viptela had grown itself into about $25 million in revenue, and that based on that, Cisco’s price was more than fair.

“These guys did $25 million in revenue for last year and sold for over $600 million,” this person said. “A $610 million exit? That’s a great story.”

Michael GoguenMichael Goguen.LinkedInBut competition in the field was increasing, and Viptela needed strong, solid leadership and a board that believed in it to fend off the threats — startups like Aryaka, Versa Networks, and CloudGenix, for instance. And Cisco had invested in a competitor, too: VeloCloud.

Cisco also had a couple of competing products, such as Intelligent WAN, or iWAN, and it bought a startup called Meraki for $1.2 billion a few years before. Meraki was mostly known for its wireless LANs, but small businesses were using it to connect remote offices to cloud apps, too.

All told, when Viptela went looking for a sale, it wasn’t in a strong negotiating position.

Even so, most analysts say Viptela’s technology will be a good fit for Cisco’s iWAN products, helping it sell more networking software to enterprises and service providers. Cisco is trying to remake itself into more of a software company, so this purchase could be great for that.

While most of Viptela team is joining Cisco, it’s unclear if both founders will join as well. We’ve heard Amir is contemplating enjoying his exit and kicking it up at the beach instead.

Viptela declined to comment, and Cisco did not return a request for comment.

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