Nicira is a start-up right out of the Silicon Valley playbook with a $1.26 billion ending, in just five years.
VMware's decision, announced Monday, to buy this network virtualization company will likely be cited as a starring example of why Silicon Valley remains the world's engine of innovation.
The sale has all the classic elements of a Silicon Valley start-up. Whether Nicira can deliver on its promise is now up to VMware, which must make its new technology work with everything else it sells, say analysts. But for the Nicira's founders and investors, their big day has arrived.
Networking virtualization technology is to virtualization what server virtualization was to servers seven or more years ago. It's still new, its market size is still small, but it will grow rapidly because this technology is needed, say analysts. Nicira seemed perfectly timed for it.
The story begins with strong links to the local universities, Stanford and the University of California at Berkeley. Martin Casado, a co-founder and chief technology officer of Nicira, developed much of the initial work and invention while at Stanford.
Other co-founders are Nick McKeown at Stanford, and Scott Shenker at U.C. Berkeley, who is also Nicira's chief scientist. McKeown and Shenker were Casado's doctoral advisers.
The new company set up shop in Palo Alto, Calif., in 2007 and won venture capital backing from Andreessen Horowitz and Lightspeed Venture Partners, among others.
Although the company spent the majority of its life in stealth mode, it attracted some large customers, including eBay, AT&T, NTT and Rackspace. This all led to VMware's decision this week to buy the Palo Alto start-up for $1.05 billion in cash and $210 million of assumed unvested equity awards.
VMware's purchase, and what it paid, "is a huge indicator" that they needed a technology that can help them address the entire network and not just a switch, said Andre Kindness, an analyst at Forrester Research.
Even though a lot data centers have virtualized storage and servers, Kindness said they aren't necessarily getting increased efficiency because the networking requires a lot of manual intervention.
Software-defined networking, which broadly encompasses the technology Nicira makes, enables dynamic creation of networks in much the way same that server virtualization allows users to create virtual machines.
Nicira's founding collaborators invented OpenFlow, a networking protocol for software defined networks, but the company's portfolio is broader and includes developing a platform for managing a virtual networking infrastructure.
Kindness said that few people outside the industry still know about OpenFlow.
"We're at the birth at this technology," said Kindness, who said he was surprised at the value put on the company by VMware. And while the firm has assembled a solid list of users, "it's difficult to know how much [of the technology] they have put in production," he said.
"Nicira has a great networking team and VMware was starting to get bypassed by IBM and HP," which are working on their own virtual networking products, Kindness said.
But analysts, including Kindness and Rohit Mehra at IDC, said the need for network virtualization is clear. They say the benefits of virtualization are hindered by labor-intensive networking tasks imposed on data centers.
"To make the IT architecture more flexible, dynamic and respond to the needs to the application, the network needs to be an equal player," said Mehra. "And the only way to do that is to virtualize the network."
IDC has sized the OpenFlow market alone at slightly more than $100 million this year, with it expected to reach $2 billion by 2016. "That is a significant growth," said Mehra.
Nicira is far from the only company in the software-defined networking space. Plexxi, another firm, announced $20.1 million in new financing last month. Some other companies include BigSwitch Networks and Vello Systems
Gartner analyst Alessandro Perilli said that with the acquisition of Nicira, VMware "has a chance to significantly move forward in cloud management."
But Perilli said that it will be a matter of execution. "VMware has yet to prove that vCloud Director, vCenter Operations Management, DynamicOps, Nicira and all other products can be integrated in a cohesive cloud management platform," he said.
