Cisco Systems is preparing to invest in Russia and Eastern Europe this year as a limited partner and, potentially, as a direct investor, PE Week has learned.
The San Jose, Calif.-based networking giant, which has ramped up international venture activity for the past year-and-a-half, is evaluating funds with Eastern European expertise to potentially invest as limited partners, says Hilton Romanski, Cisco’s corporate business development director who specializes in global ventures and acquisitions. He says that the company plans to finalize LP investment decisions later this year.
Cisco envisions investing about $130 million in Eastern Europe and emerging economies of Central Europe over an unspecified time frame, he tells PE Week.
Romanski says that driving Cisco’s interest in Eastern Europe is a skilled technology workforce, fast-growing economies and flourishing stock exchanges. “These are markets where IT is being implemented and adopted at a rapid pace,” he says.
Government statistics support his characterization. Income generated by the information technology and communications industry in Russia rose 21% in 2006, compared to the year before, and the Russian economy grew an estimated 6.6%, according to Russia’s communications ministry. In addition, most Eastern European nations posted GDP growth rates of between 6% and 9% in 2006, according to the CIA World Factbook. And the Russian Trading System, the region’s version of the NYSE, is up more than 300% over the past three years.
Cisco is not the only investor with an eye on the region. As PE Week reported last year, Silicon Valley VC pioneer Pitch Johnson, founder of the Asset Management Co., is raising a tech venture fund targeting Russian startups called Russian Technology Fund II. And Colin Breeze, founder of Breeze Ventures Management, an emerging fund manager based in Palo Alto, Calif., is raising a fund-of-funds called the Russia Strategy Fund. Breeze says that the fund might work closely with such venture firms as Russia Partners, Quadriga, Mint and DFJ Nexus, the Russian affiliate of Draper Fisher Jurvetson.
Cisco’s approach to Eastern Europe reflects its longstanding strategy when entering new investment markets. While the company commonly makes direct venture investments in U.S. tech startups, Romanski says, it prefers to partner with local funds in countries where it has a limited history of doing business.
For instance, the company has invested in Asia as an LP in the SoftBank Asia Infrastructure Fund. In Israel, Cisco is an investor in Sequoia Capital Israel. Besides holding stakes in startups as a Sequoia LP, Cisco has made six direct investments in Israeli companies, including two that did not involve the venture fund, according to Thomson Financial (publisher of PE Week).
Even though Cisco has made numerous venture investments in Western European companies, the company has not directly funded an Eastern European startup. Thus, Romanski says that it makes sense for Cisco to partner with a local venture or private equity fund that’s focused on technology startups. In the future, however, Cisco “may choose to put our own people in place,” Romanski says.
Romanski says that going forward, Cisco also plans to focus on investments in Africa, Latin America and the Middle East. He notes that China and India continue to be “incredibly important markets” for Cisco and that the company’s focus on Eastern Europe will not diminish its attention elsewhere on the globe.
As for acquisition targets, Cisco continues to scoop up companies that diversify its core business of routers and switches. The company has recently expanded in security and digital media, with an emphasis on technologies tied to video.
Last week, Cisco announced that it purchased assets of Utah Street Networks, the operator of venture-backed social networking site Tribe.net. Financial terms were not disclosed. But San Francisco-based Tribe had raised $10.5 million in venture and early stage funding since 2003, from Knight Ridder, Mayfield Fund and The Washington Post Co.
Cisco’s purchase of Utah comes a month after it disclosed the acquisition of social networking software maker Five Across Inc. for an undisclosed amount.
In February, Cisco bought Reactivity, a provider of XML (eXtensible Markup Language) services to businesses. Since 2000, Redwood City, Calif.-based Reactivity has raised $51 million in venture funding from Accel Partners, Austin Ventures, Diamondhead Ventures, JK&B Capital and Maveron Equity Partners.
Cisco’s largest acquisition this year was the planned purchase, announced in January, of network security company IronPort Systems for $830 million in stock and cash. Since 2001, IronPort had raised $94 million in venture funding from such venture backers as Menlo Ventures, Allegis Capital and ChevronTexaco Technology Ventures.