After years of starts and stops, the 10 Gigabit Ethernet switch market is starting to take off, and venture capitalists are betting that the time is ripe for new investments in the space.
Norwest Venture Partners is set to announce tomorrow that it led an $8 million Series A round in ClariPhy Communications. Onset Ventures and Allegis Capital also participated in the round.
ClariPhy, based in Irvine, Calif., is a fables chipmaker developing integrated circuits that target optical networks in the enterprise that run at 10 Gbits per second.
ClariPhy isn’t shipping a product yet, but potential customers are network equipment vendors that sell into the enterprise, such as Brocade Communication Systems, Cisco Systems, Extreme Networks and Foundry Networks.
The ClariPhy deal follows on the heels of a $10 million Series B round in October for Aeluros, another fabless chipmaker focusing on the 10 Gbit market.
The backers on that deal were UOB Venture Management Ltd., New Enterprise Associates and Worldview Technology Partners (see PE Week, Oct. 25).
There was a lot of hype about the 10 Gbit market four years ago, but it has developed much slower than analysts had expected. While there is always a keen interest in speeding up networks, two issues slowed the shift from 1 Gbit to 10 Gbit.
One, the economy went into a downturn and potential customers were less willing to spend money to upgrade. Two, the price was insanely high for 10 Gbit Ethernet switches – about four times more expensive than the 1 Gbit variety, according to the Dell’Oro Group, a networking market research firm in Redwood City, Calif.
The price has fallen considerably over the past two years, and sales are starting to ramp. Dell’Oro expects sales of 10 Gbit Ethernet switches to break the $1 billion revenue mark in 2006, up from just $350 million this year. To put that in perspective, the overall Ethernet switch market is expected to be about $13 billion this year.
“In these market transitions there are often opportunities for new vendors to break into the market,” says Seamus Crehan, an Ethernet switch analyst for Dell’Oro. “People are really, really watching this market.”
ClariPhy, which was founded in 2002, appears to be well positioned, since it expects to start shipping products late next year. “It seems like there’s a thawing in the market,” says Robert Abbott, a principal with Norwest and a member of ClariPhy’s board. “I think it’s the right time to get in.”
While it is still emerging, the 10 Gbit market is expected to be very competitive. It will include established players in the 1 Gbit space that will likely migrate up, such as Broadcom Corp. (Nasdaq: BRCM) and Marvell Technology Group (Nasdaq: MRVL).
Then there are those chipmakers that were targeting service providers, but have since expanded their sales to enterprise customers. That group includes Vitesse Semiconductor (Nasdaq: VTSS).
Finally, “You always have to assume there’s another startup that’s doing the same thing,” Abbott says.
Besides Aeluros, other venture-backed startups targeting the 10 Gbit market include BigBear Networks of Sunnyvale, Calif. BigBear raised an $18 million Series C round in November 2003 from Menlo Ventures, Accel Partners, Austin Ventures, Oak Investment Partners and Sequoia Capita.