Arista, Uber, Silicon Valley

Last week, at least, to me was perfect illustration of how and what media perceives as technology. Everywhere you looked, you saw coverage of Uber and its ability to raise money at a jaw-dropping valuation ($1.4 billion at a valuation of $18.4 billion) and on the flipside was the miserly amount of attention accorded to Arista Networks, an old fashion, honest-to-god technology company that took no money* from venture capitalists and was co-founded by one of living legends of Silicon Valley that went public earlier this week.

Arista (ANET) makes high speed switches that are key to making data centers, the hub of modern Internet work at blazing fast speeds. Arista’s high speed switches don’t make an appearance in Michael Lewis’s Flash Boys, but they should, for those high-speed trading jockeys appreciated the company before everyone else. Microsoft loves it so much that it now makes up about ten percent of their revenue. Arista which has revenues of $361 million and profits of over $42 million raised $226 million from the market ended its first trading day being valued at $3.56 billion.

Every industry has folks who have special kind of genius, some operational, some creative and some technical. Harvey Weinstein and Robert DeNiro come to mind when I think of Hollywood. Ron Dennis is a giant of F-1 racing. Andy Bechtolsheim is that special person for Silicon Valley— a man whose list of accomplishments are longer than most. Many of his peers are playing golf, but he is still starting companies. He has helped start Sun Microsystems, was mucking around with what became routers while at Stanford, started and sold many companies and oh, by the way was the first guy to cut a check for Google guys.

There is a handful of people I have been in awe of — Andy is one of them. It is the greatest dividend of my writer life that I got lessons in networking from him. At Arista Networks, his cofounders Ken Duda and David Cheritorn (who has left the company and his startup, OptumSoft is suing Arista ) are no slouches either. And in a world starved with female leader/rolemodels, there is a Jayshree Ullal. And while, she recently made the wrong kind of headlines a few weeks back, Ullal, a former Cisco executive remains an under appreciated executive.

Arista, from a story telling standpoint is a rich vein to mine. It’s success should be a moment to celebrate that it is an old school tech company. It has invented a new technology, its founders are quirky and eschew the current Silicon Valley system and they live in the far corner of the Bay Area (Santa Clara) which for me is the heart of real Silicon Valley.

So why such as schism in the attention accorded to this company versus Uber (which I love and think they are akin to Google)? The reason — is that Arista’s technology is unseen and also understood by very few, including those in the tech media. Uber, on the other hand is on the first screen of everyone’s phone and they are part of everyone’s regular flow. Tech media corps are daily users of Uber and thus remain fascinated by the company.

For someone to write about Uber, it doesn’t take a lot of effort. It is fairly easy to understand — at least at the surface level — and its firebrand CEO Travis Kalnick is blunt and direct, often saying politically incorrect things that would make even Bill Maher blanch. This flywheel of attention has helped Uber become a verb faster than any other company which in turn has helped the company get money from investors and expand at break neck speed to 130 countriescities in 37 countries.

This divide in software (+services) and hardware is reflected in the declining investments in what an analyst for VC research firm calls, “in the future.” In a report this week, Pitchbook comes up with various reasons why we have seen a major decline in non-software IT companies. Here are the salient arguments from the Pitchbook piece:

  • The proliferation of seed financings has made it easier for startups to receive initial funding and easier for VCs to make low-risk bets on relatively non-inventive companies.
  • Software startups, making apps or social networking startups are generally less-complicated and cheaper to get off the ground, and much easier (and quicker) to sell to potential acquirers down the road.
  • VC funds simply do better in categories where “the innovation cycle is short, such as media and software.”
  • Hardware IT and biotechnology, because the time frame to exit for these types of companies tends to run longer than the typical lifecycle of a VC fund.

While there is a lot of truth in what Pitchbook is saying, but I do think when it comes to hardware-and-software, everything is a lot more nuanced. Back in the day, like Arista, Juniper came up with a new hardware architecture for its routers optimized for the faster and faster Internet. They made their own chips and their own hardware and they also wrote the software that made all that hardware oomph work. The software they developed then JunOS is what has kept them in business. Arista too is cut from the same cloth. Arista has its own software which is what makes it a must buy for web infrastructure giants such as Microsoft. They sell hardware, but in a sense they are a software company.

Similarly, Google which is primarily an ad-and-search company, has pushed the envelope more on core networking and infrastructure technologies than any so called real hardware company. Facebook which primarily makes a social environment and managed a web ID-system has developed hardware to meet its own unique needs. I bring this up, is because the worlds of software and hardware are more entwined than we think.

However, the gulf is that of perception. In order to understand Arista, you need to understand the networks and how they have evolved. Uber on the other hand is easy to grok — and fun. I mean who doesn’t like to use math to pick apart a company blog post. (Oh, hi Felix!) From an investor standpoint, it took Arista Networks ten years to get to public markets. Its returns languish behind, say a company like Uber which is worth about 9 times without even tapping the public market after five years of being in business. So, if you are a professional investor it makes sense to take the shorter route to profits.

That explains why we are seeing fewer investments in the older style of tech companies, which in turn has forced the hand of companies like Facebook, Google, Apple and others to look inwards to find ways to push the envelope.

Arista and Uber, two very successful companies do a good job of illustrating the dichotomy of technology industry and the increasing gulf between the classic Silicon Valley and the new San Francisco-centric technology ecosystem that is more focused on creating tech-enabled services and new kind of media.

Update: *Khosla Ventures is a small investor in Arista Networks. Vinod Khosla was one of the co-founders of Sun Microsystems.

A letter from Om

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