But one has just done it. Virtela Communications Inc., a 75-person service startup that provides managed IP VPN services for mid-sized to large enterprises, is bucking the trend with $11 million in series C funding. This latest round, which brings the company’s total to $86 million, is expected to last until the company becomes profitable sometime in the next 12 months, say company executives (see Virtela Gets $11M, Wins at Extreme).
"More power to them," says Michael Suby, senior research analyst at Stratecast Partners. "It's an accomplishment for anyone to get funding these days."
The company is addressing a hot market. According to IDC, the IP VPN services market topped $9 billion in 2002 and will grow to $13.4 billion by 2007. IP VPN services will become the most popular WAN technology by the end of the forecast period, according to IDC analyst Steven Harris.
The company, which is now about three years old, has lined up an A-list of executives and backers. Norwest Venture Partners led the round and was joined by previous venture backers, New Enterprise Associates (NEA), Palomar Ventures, North Coast Technology Investors, and Newton Technology Partners.
The company previously received second-round funding from a few of its vendors, including Juniper Networks Inc. (Nasdaq: JNPR), RSA Security Inc. (Nasdaq: RSAS), and Symantec Corp. (Nasdaq: SYMC).
Executives such as Vivek Ragavan, president and CEO of Atrica Inc.; Mike Volpi, chief strategy officer of Cisco Systems Inc. (Nasdaq: CSCO); Gordon Stitt, CEO of Extreme Networks Inc. (Nasdaq: EXTR); and Hasan Ahmed, CEO of Sonus Networks Inc. (Nasdaq: SONS) have been advising the company on its strategy.
Vab Goel, a former vice president of IP network engineering at Qwest Communications International Inc. (NYSE: Q) is chairman of the board and acting CEO. Goel, a partner at Norwest Ventures since leaving Qwest in 2000, invested in Virtela early.
While at Qwest, Goel created and implemented the carrier’s IP and data-center strategies. He also served as a VP of emerging technologies, the group responsible for identifying new networking technologies. Before Qwest, Goel worked at Sprint Corp. (NYSE: FON), where he was the principal architect for the Sprint Internet backbone and where he contributed to the company's IP and optical network strategy.
Most of the other key members of the management team worked with Goel at Qwest and at Sprint.
“There is no better management team out there for building networks,” says Goel. “We could have easily raised half a billion dollars back in 2000 if we had wanted to based on the engineers involved with this company.”
Two key elements are essential to Virtela’s model. First, the company leases bandwidth from providers like AT&T Corp. (NYSE: T), Level 3 Communications Inc. (Nasdaq: LVLT), Qwest, and WorldCom Inc. (OTC: WCOEQ). Second, it optimizes the performance of the overlay network that uses multiple carrier networks. To do this, the company has developed a routing algorithm to constantly monitor these links, and if trouble occurs on one link, it finds the optimal failover path quickly.
Today, the company’s service network consists of 16 service points of presence in the U.S. and three abroad -- in London, Singapore, and Tokyo. Each POP houses IP VPN service switches. The company says it uses gear from multiple vendors, including the Springtide service switch from Lucent Technologies Inc. (NYSE: LU), Ethernet switches from various vendors like Extreme, and routers from Juniper and Cisco. Given that most of Virtela’s network architects come from Sprint, it’s little surprise that the company uses IPSec for IP tunneling and encryption instead of Multiprotocol Label Switching (MPLS).
So what makes Virtela’s IP VPN service different from a service offered by big carriers like Sprint or AT&T?
- Unlike the facilities-based carriers, Virtela can offer global reach. AT&T, Sprint, WorldCom, along with the RBOCs, are, for the most part, still regional. Some, like 360networks Inc. and Global Crossing Holdings Ltd., tried to build out worldwide networks and they’ve failed. Virtela can use existing networks to stitch together a global net.
- Virtela also claims a performance edge. Because it is constantly monitoring the network and can leverage links it has leased from other carriers, the company can maintain strict SLAs with customers. This improved performance also allows the company to offer value-added services like video conferencing and voice over IP.
- Virtela says it is cheaper than traditional carrier services. Goel claims Virtela’s services offer a 50 percent reduction over traditional frame relay services. In the U.S., Virtela’s prices range from $300 for broadband connectivity to $1,500 for T1-like connectivity. This includes service and support, plus any customer premises gear that needs to be installed. WorldCom’s Bundled Frame Relay Service, introduced last spring, costs about $1,700 per month -- but that doesn’t include access. When voice and video services are added to the Virtela network, it saves enterprise customers even more.
The company isn’t without challenges. While Virtela may have saved a great deal of cash by not building out its own network, that means it must rely on agreements with suppliers, which are often also competitors.
But with wholesalers like Global Crossing and WilTel Communications Group Inc. (Nasdaq: WTEL) back on the scene, it likely won’t be a problem, says Stratecast's Suby. These carriers will be all too eager to sell bandwidth, and since most carrier backbones are only 20 percent utilized, other carriers would be hard-pressed to turn away business, even to a potential competitor.
“Sales execution will be the biggest hurdle,” says Suby. “First, they have to convince customers that IP VPNs are better than their current frame relay offering. And then they have to prove why they offer a better solution than the big carriers.”
— Marguerite Reardon, Senior Editor, Light Reading