Cisco’s $20B lunch: Arista and 20+ other startups line up for the buffet

Last week, software-defined networking startup Arista Networks made an initial public offering that hit a lofty $3.8 billion. And that’s just the first of over 20 similar startups attacking networking incumbent Cisco, according to a new report from longtime industry analyst Scott Raynovich.

“Cisco is kind of like the Windows of networking,” Raynovich says. “Everyone wants something that is leaner, has better interoperability with other systems … Cisco’s definitely freaking out about it internally.”

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Software-defined networking (SDN) is the disaggregation of the software-based network control from the actual hardware. In the Cisco model, software and hardware are closely tied together — vertically integrated. The SDN model, however, is horizontally integrated, just like the Android ecosystem, where a company like Google might provide the software, but another vendor such as Samsung provides the hardware.

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Scott Raynovich’s SDN Revolution: An Ecosystem Report is currently available on VB Insight.

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That change is taking over Ethernet switches, security and firewall boxes, routers, and load balancers, according to Raynovich. He says the SDN vision is that the future will be just like the current PC market: commodity hardware with whatever software you want for various functions.

But Arista is not the first big exit in software-defined networking.

Virtualization giant VMware snapped up Nicira for $1.2 billion last year in the first big exit for SDN innovators, hoping to do to networking virtualization what it has already done for servers. Also, NTT bought Virtella late last year for $525 million, and Cisco itself completed the acquisition of a self-funded virtualized networking startup, Insieme, for close to a billion dollars.

A lot of networking virtualization startups are targeted at the web-scale data centers giants like Facebook, Google, Amazon, and others are building, Raynovich said, perhaps because it’s there that software can provide huge benefit.

“Software’s very important … the hardware has to be very fast, but we need more software brains,” Raynovich told me. “The software knows where the data is, where it needs to go, what traffic patterns it has, how it can avoid congestion, and how it can help prevent denial-of-service attacks.”

SDN has so far seen about $600 million in venture capital, with another $1 billion expected over the next few years. VCs such as Andreessen Horowitz, Greylock, Kleiner Perkins (KCPB), and Lightspeed are leading the charge, with investments in Nicira, Plexxi, Big Switch, and Cumulus, among others.

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Vendors like Dell, who see the trend as an opportunity to enter the lucrative networking market, are also investing in SDN.

All told, there’s already been about $3 billion in exits.

“This is the same model as server virtualization followed,” Raynovich says. “I think it’s going to happen … you see it all the time: large incumbent companies in areas that are stable and making lots of money, and disruptors coming with a tweak that try to grab market share.”