Hammerhead Nails $25M

Hammerhead Systems Inc. smells blood in the edge services market

The Mountain View, Calif., company today announced that it’s landed a Series B round worth $25 million, money it will use to come to market with a new edge services product designed to replace aging ATM and Frame Relay gear made by incumbents such as Lucent Technologies Inc. (NYSE: LU) and Cisco Systems Inc. (Nasdaq: CSCO). (See Hammerhead Secures $25M.)

The product, which is in carrier trials and currently being referred to as the “Migration Edge Switch” by Hammerhead, connects Frame Relay, Asynchronous Transfer Mode (ATM), and Ethernet services over Multiprotocol Label Switching (MPLS) or ATM backbones. Hammerhead’s betting that service providers will be willing to upgrade to more economical and flexible networking gear for their ATM and Frame Relay networks.

Hammerhead officials claim their product will deliver 10 times to 30 times the density of existing Layer 2 equipment and reduce costs by 30 percent. The product has a particular emphasis on improving density for Frame Relay services.

Hammerhead claims one “Tier 1 RBOC” and a “network service operator” as trial customers but will not name them. Hammerhead may find a captive audience. Major carriers such as Verizon Communications Inc. (NYSE: VZ) and SBC Communications Inc. (NYSE: SBC) have been interested in upgrading their aging ATM and Frame Relay networks, and sources say they’ve been struggling to find the right product. The leading incumbents in this area are Lucent, which got into the market by aquiring Ascend Communications in 1999, and Cisco, which gained a foothold in the ATM and Frame Relay switching market when it acquired Stratacom in 1996.

Many analysts believe this is a golden opportunity for startups -- because they’re stepping into a market that’s being slowly abandoned by the large incumbents.

“If you think of every Lucent CBX customer, one thing they clearly have on their Christmas list is a follow-on product in that market,” says Geoff Bennett, chief technologist of Heavy Reading, Light Reading's paid research division. “If somebody wants to jump in that space, I’m sure the customers would be delighted."

Rob Keil, Hammerhead’s VP of marketing, says the incumbents have left an opening in the market by not having the proper products.

“None of the incumbents invested in Frame Relay, and startups such as Wavesmith did not optimize for it,” says Keil, who believes that Hammerhead’s product has the “killer economics” to become the next-generation box.

Hammerhead’s CEO, Joe Sigrist, was the president of edge access sytems at Lucent and VP of product management for Ascend’s remote access business. Keil was a senior group manager of Cisco’s Multiservice Switching Business unit before becoming VP of marketing at now-defunct optical networking startup Zaffire.

Hammerhead’s investors include Foundation Capital, Mayfield, Enterprise Partners Venture Capital, and Lighthouse Capital Partners, which have Hammerhead board members with experience in the edge services markets. Bill Stensrud, a partner at Enterprise, was formerly a founding VP of marketing and business development for Stratacom; Kevin Fong, from Mayfield, invested in Crescendo (acquired by Cisco) and Redback Networks Inc. (Nasdaq: RBAK).

So is Hammerhead the Frame Relay and ATM version of the Cerent story? (Cerent was a startup that found success by upgrading Sonet networks with a more economical box [see Was Cerent Worth It?]). Some venture capitalists who passed on this deal say the big question is whether incumbents are willing to spend money to upgrade their Frame Relay networks.

Hammerhead will likely need to forge a partnership with a deep-pocketed partner willing to resell the product, if it gains sufficient interest from service providers, which generally don’t like buying from startups.

The answers could come soon. Sources say that Verizon -- which may be one of the “Tier 1” carriers that Hammerhead’s targeting -- is actively looking for a product in Hammerhead’s market, and it’s likely to decide soon whether the startup’s worth hammering out a deal with a reseller.

(Hammerhead System is not related to Hammerhead Networks, an IP software firm acquired by Cisco Systems in may 2002 [see Cisco Buys Hammerhead, Navarro].)

— R. Scott Raynovich, US Editor, Light Reading