Cisco Systems, Ericsson Losing Business To 200 Person StartupAugust 20, 2015
by Peter Cohan
Cisco Systems and Ericsson are among the big companies losing market share to a fast-growing startup — Acton, Mass.-based Affirmed Networks.
Moreover, there’s no reason to believe that these incumbents can fight back. So should you sell Cisco’s shares? No — better to give the new CEO a chance to see if he can fix what ails it.
Before getting into that, why do startups outrun big companies? Big companies got that way by building new businesses that got big and profitable. Their leaders look at the fast-changing world in which they compete and conclude that if their company does not make a product, their customers don’t need it.
In a nutshell, most big companies have a big orange, and they would rather squeeze every last drop of profit out of it than make a bet on a completely new business.
But startups have a different mentality. They know that customers — especially big corporate ones — are not going to risk their business by buying a product from a small company that’s likely to go out of business.
One way a startup can survive is to build a product that meets a burning need that its customers will have two to three years in the future. If the product is highly engineered, the startup is making a big bet that it can foresee the future presciently and by the time that future arrives, it will have a big lead over rivals in developing a product to meet that need.
Affirmed Networks — it makes bundles of software running on cheap hardware that “virtualize mobile networks” — is doing just that. Since Affirmed got off the ground in 2010, it has raised $156 million in venture capital, is approaching a $1 billion valuation, has over 200 employees, and has taken 25 mobile operator customers from the likes of Cisco and Ericsson with over 40 trials that could turn into customers.
Hassan Ahmed — who holds a Ph.D in Electrical Engineering fromStanford University — has plenty of experience turning ideas into public companies.
He was previously vice president of Engineering and Chief Technology Officer for Cascade Communications then served as executive vice president and general manager of the Core Switching division of Ascend Communications.
But his biggest hit was serving as Chairman and CEO of Sonus Networks for 10 years “growing it from an idea into a publicly traded company focused on enabling the transformation of telephony to IP.”
As a Senior Advisor at Charles River Ventures, Ahmed came up with the idea for Affirmed as part of a thought experiment. As he explained in an August 17 interview, “I was looking at the mobile space and trying to figure out how it would be disrupted. Affirmed is intellectually honest because weren’t trying to start it.”
He realized that there would be a growing need for mobile networks to carry more data. Ahmed had based Sonus on another prescient bet — that networks built to carry voice would need to carry much more Internet traffic.
He saw that mobile networks would burn cash unless they could raise prices and lower costs. As Ahmed explained, “I looked at mobile and realized I had seen this movie before in the wired network. The economics were incontrovertible — the costs to expand mobile networks to carry more data would rise while the average revenue per user would drop. Thus mobile networks needed a new architecture.”
To lower costs, Ahmed envisioned network equipment that a mobile operator could add at a lower cost because its intelligence was lodged in software that ran on commodity hardware — dubbed mobile virtualization.
But Affirmed also helps mobile operators to boost revenues by letting them test out new offers — like charging fans of bicycle racing $10 a month to watch the Tour de France live. As Ahmed explained, “Our product lets mobile operators set up such new services in 10 to 15 minutes – setup takes nine to 12 months using traditional architectures.”
Affirmed’s product has cost business for its publicly-traded rivals. “We have 25 mobile operators as customers in the U.S. and WesternEurope. In every one of those deals we faced off against Cisco, Ericsson, and other publicly-traded companies,” said Ahmed.
Affirmed was valued at around $600 million at its last financing round and its growth has probably propelled that valuation to about $1 billion — something that a new round of investment will clarify. “When we raised our last round of financing 18 months ago, we were close [to a $1 billion valuation] – at 60% to 70% of that. We are striving for unicorn status and due to our growth since then, we are probably close to it.”
In the 1990s, Cisco probably would have acquired a company like Affirmed. But Ahmed wants to take it public. “We can build a really great company that transforms how mobile networks operate. If we continue to do that, we want a home in the public markets.”
With Cisco’s new CEO – Chuck Robbins – having recently announced expectations-beating earnings, now may not be the time to dump its shares. It is even taking steps to dump “under-performing and non-core businesses,” according to NASDAQ.
But Robbins has to push Cisco to do a much better job of balancing the desire to protect its traditional sources of profit while placing new product bets on where the networking puck is headed in the next three to five years.
I would not be surprised if Affirmed gets to the public markets before Robbins’s strategy starts paying off for Cisco shareholders.