John Katsaros

It's All Good

Our corner of the world — "infrastructure" — has been beaten up over the past couple of years by financial types wondering how new companies in this space can ever make significant returns for venture investors. In the past few years acquisition has been the preferred exit strategy, often at a distressed price. "Home runs" have been few and far between. But 2009 looks like the beginning of a new chapter in that book. Four public infrastructure companies that we watch — ArcSight, Acme Packet, Riverbed and Sourcefire — went public between late 2006 and early 2008. For the most part they hovered around their offering price, in some cases spending many months below it. But that's changed. Despite the recession, 2009 has been a wonderful year for this group as the table below shows — with ArcSight leading the pack at 5x its share price at the beginning of the year. It's probably too soon to pontificate about these.

 Infrastructure Recent IPO's Growth in 2009

Mazu Lives On

Last month Riverbed announced that it had acquired Mazu Networks for about $25M. Mazu was one of a small group of companies trying to productize functionality based around Network Behavior Analysis technology. For reasons that we won't go into here but which have to do with the difficulties of technologies seeking markets (rather than the other way around), Mazu tried hard for many years but could not find a "killer app" with sufficient demand. Riverbed plans to re-introduce the Mazu profiler as Riverbed Cascade™ to provide visibility into end-to-end application delivery dependencies and Network Behavior Analysis (NBA) to address management gaps. Who knows, maybe this formula will work and Network Behavior Analysis will prove to be a valuable addition to the Riverbed customer base. Riverbed, at least, has a bunch of really smart people, has a large installed base in the WAN market which has always been hungry for more network visibility and wants to broaden its product line. It will be interesting to watch.

Infrastructure Stocks Struggle

After watching so many acquisitions in the infrastructure sector occur over the past five years, it's been our hope that the IPO market for infrastructure companies would pick up so that we could get back to the good old days and have multiple exit alternatives for successful infrastructure startups. And with the infrastructure IPOs that have occurred in the past year, it looked like that was finally happening. VMware's IPO last summer seemed to be a clear indicator -- after coming out in the fifty-ish range it doubled to the $115 range by November. But VMware has seen its price tumble to the mid $50 range. And other infrastructure IPOs looked good early on too -- Sourcefire and Acme Packet each looked like IPO poster boys for success. But the market has been brutal this past fall and winter -- both companies are now trading at their lowest levels since their IPOs and have lost over half of their market value. And Riverbed Technology has been trading in the $18 range, near its IPO price, after breaking $50 last fall. Despite all of these indicators, in what you could call a daring move, ArcSight went public in mid February, priced at $9 per share, a level that it hasn't closed at since its IPO (that's got to be an ugly story when you get into the details, talk about poor timing...). Of course, when you try to read the tealeaves on how the public market treats infrastructure, you have to consider how Cisco is faring since it sets the stage for so much of the business -- CSCO is trading around $24, down about 30% since its recent high this past fall.