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Cisco Sniffs Out NetSift

Light Reading
News Analysis
Light Reading
7/1/2005
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It's not a spin-in!

NetSift, the startup acquired by Cisco Systems Inc. (Nasdaq: CSCO) for $30 million in cash and stock, is an honest-to-goodness startup. But you wouldn't think that, given the year-old company with undisclosed technology managed to catch Cisco's eye while being nearly invisible to the telecom market as a whole (see Cisco Nets NetSift for $30M).

But that's how startup life can be when Cisco is on the prowl. And recent weeks have seen a cluster of these smaller acquisitions, with chip firm Vihana getting bought for $30 million last month and the enigmatic M.I. Secure going for $13 million just recently (see Cisco Acquires Vihana and Cisco Buys Startup for $1.2M per Employee). NetSift's situation -- a small, young, unknown company getting bought for an eyebrow-raising sum -- smacks of a startup bred and incubated by Cisco. After all, Cisco has used the "spin-in" technique before, investing in startups such as Andiamo Systems with the intention of acquiring them later (see Cisco Goes Spin-Crazy and Cisco Buys Andiamo). The signs were even more sandbag-to-the-cranium obvious with M.I. Secure, whose home address happened to be inside a Cisco building.

But NetSift, unlike M.I. Secure, appears to have grown up independently of Cisco. The company was founded a year ago by researchers at the University of California, San Diego: professor George Varghese and Ph.D. student Sumeet Singh. Both took time off from academic pursuits to run NetSift, which was developing technology stemming from their UCSD research.

NetSift's seed funding came from UCSD's William J. von Liebig Center for Entrepreneurism and Technology Advancement, which works with UCSD's engineering school to turn ideas into commercial products rapidly.

The speedup model obviously worked for NetSift, which raised a Series A round from Enterprise Partners Venture Capital along the way. But even if it's running fast, how does a little startup get the attention of a company like Cisco?

Good question. Cisco would not allow NetSift's founders to speak with Light Reading by phone, and when the question was posed by email, Cisco's response was, "The details of individual acquisition are strictly confidential and not up to discussion."

Dr. Varghese did tell Light Reading in an email that Cisco's fellows and top engineers keep tabs on the academic community. So, apparently, they were keeping up on Varghese's work, which focuses on the development of faster routing and switching algorithms.

In fact, a look at Varghese's patent portfolio and Singh's published papers suggests Cisco might have been in contact with them for some time. Both worked on areas such as IP lookup algorithms, which are critical to modern routers and could help search-engine chips replace ternary content-addressable memory (TCAM) chips. Cisco has been quite interested in this subject for years, making it only natural that the company should be aware of the UCSD team's work.

Varghese was a known quantity in routing circles anyway, as he'd lent a hand to Tony Li on some designs at Procket Networks, the core-router startup whose technology was acquired by Cisco last year (see Cisco to Pay $89M for Procket Assets).

Even though Cisco typically issues press releases for even the most obscure startup purchases, it tends to avoid saying what the startups actually do, essentially keeping them in stealth mode. Cisco's release doesn't explain NetSift's work beyond a vague allusion to "a unique solution to deep packet processing challenges." M.I. Secure, which had no products, got a slightly better description from Cisco: "advanced features and functionality for security and VPN solutions."

Then there was Vihana, which developed "efficient semiconductor solutions." About as descriptive as saying the employees eat food and drive cars.

But as for why they were acquired, chalk it up to R&D. In NetSift's case, "deep packet processing" is a subject that's been a fascination of Cisco's. And Cisco isn't bashful about using acquisitions as a means of product development. It's faster than doing things inhouse and, with $16 billion in Cisco's coffers, certainly affordable.

"A lot of it is time-to-market," with these little deals, says Mark Sue, an analyst with RBC Capital Markets. And Cisco's sudden appetite for acquisitions is "nothing unusual," he says, just "back-to-normal for Cisco in terms of new product development."

— Craig Matsumoto, Senior Editor, Light Reading

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