How Gigamon’s Founders Bootstrapped a Networking Hardware Company to Profitability
Ted Ho, the CEO of Gigamon, jokes that in its early days, the Milpitas, CA-based network appliance maker had four chief financial officers: the founders’ wives. “Every time we would run out of cash, we’d go back to our wives and say ‘Hey CFO, I need more money,” Ho says.
But that’s the way it works when the venture community doesn’t understand your startup: you bootstrap. Gigamon, which makes devices that tap into high-speed corporate data networks so that IT administrators can attach other monitoring equipment, failed to win any venture backing out of the gate in 2004. So for the first two years, it was financed entirely by the founders—and their wives.
In the end, Ho says today, that was probably the best thing that ever happened to the company. It forced the founders down a technological path that made Gigamon’s products both affordable and flexible—with the result that the company has been growing 60 percent year-over-year for the past five years. And that has been a strong enough performance to the push the company into the black.
Being in that fortunate position meant that it wasn’t until late 2009 that Gigamon finally decided to go back on the fundraising trail. “We really didn’t need any money,” Ho says. “But one day we sat down and asked, what is preventing us from growing even faster? It was resources.” This time out, the company was offered multiple term sheets, and in February 2010 it accepted a $22.8 million investment from Highland Capital Partners of Lexington, MA.
You wouldn’t think it was possible, these days, to start a hardware company using just friends-and-family money. And in fact, every time Ho and his co-founders Patrick Leong, King Won, and Thomas Cheung visited Sand Hill Road back in 2004, they’d run into a similar reaction. “We said we needed $2 million,” Ho recounts. “Actually, we thought $1.2 million would be enough but we bumped it up a little. And the VCs would either say ‘We’ve never heard of a hardware company that can start up for less than $10 million,’ or they’d say ‘Hey, I’ll give you $10 million, if you pretty much give up the company.'”
Of course, the founders didn’t want $10 million when they only needed $1.2 million. And this kind of funding gap—created by VCs’ unwillingness to bet small amounts of money in return for small amounts of equity—is exactly what’s enabled the rise of angel investors. But there weren’t as many of those around Silicon Valley when Gigamon was starting out.
What did Ho and his team think they could build for $1.2 million? The idea was for a “data access switch” that would make corporate networks more versatile. To understand why that was such a good idea, you need to know just a bit about networking hardware.
The leading makers of high-speed switches, such and Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NASDAQ: JNPR), compete with each other mainly on performance. As a result, network speeds edge up over time—these days enterprise network switches handle data at blinding rates of 10 gigabits per second or more. But enterprises can’t just let all that data pass by uninspected. For security and compliance purposes, among other reasons, they need to sample and monitor the data. In fact, there’s a whole industry of network monitoring appliance makers who specialize in helping companies do this. But to get the data in the first place, businesses need to tap into their network switches. The problem is that even the most expensive switches from Cisco and Juniper come with only one or two external ports each for this purpose, and the switch makers do very little to help customers tap or replicate data flowing through their devices.
“If you replicate traffic, that will usually cause a performance degradation of 1 percent to 5 percent,” explains Ho. “That may not sound like much, but when you’re competing [with other switch vendors], even 2 percent is a lot. It’s a problem all switch vendors have, and they understand it, but they don’t want to address it, because from their business point of view they don’t need to.”
That’s where Gigamon comes in. The company is like the guy who brings a power strip to a technology conference where there’s a shortage of wall outlets: he’s suddenly very popular. Gigamon’s gadgets plug into Cisco and Juniper’s switches, where they dip into the data stream without slowing it down. On the business end of a Gigamon switch, there are a bunch of extra plugs where administrators can attach other network monitoring equipment.
But “we don’t just get the data and feed it to you,” Ho emphasizes. “We really pick and choose the data you want. For example, if you have an appliance that’s only for voice traffic, we can give you just voice. Another guy might say ‘I’m only interested in HTTP, so we get you that data.” The technique for diverting specific chunks of data based on their content is called deep packet inspection, and it “gets you from a firehose down to a garden hose,” Ho explains.
It’s a pretty useful trick, and it makes Gigamon the go-to provider for almost any big organization that’s concerned about monitoring its network traffic. But it took the company a couple of years to figure out how to build its switches—which have some heavy-duty processing power built in—without spending a lot of money. For the most part, the company steered away from custom chips or ASICs (“application-specific integrated circuits”) in favor of cheaper, more flexible processors based on field-programmable gate arrays, or FPGAs. “By using these off-the-shelf chips, we could deliver not necessarily 100 percent of the functionality, but if we can deliver 95 percent, why not?” says Ho. “Time to market was the important thing.” It also settled on a basic chip architecture that’s easy to scale up without requiring a big redesign. “We went from 1 gig (gigabit per second) to 10 gig without redesigning anything,” says Ho. “It’s cheaper in terms of development, because I can have a new generation in a matter of six to eight months instead of two years.”
Gigamon introduced its first product in May 2005 and sold just 60 switches in its first year, but managed to hit profitability starting in 2006. (Along the way, Ho says, the company filed for eight patents on covering packet replication by ASIC and FPGA chips.) Today Gigamon has several hundred customers, including all of the major Internet service providers and both the NASDAQ exchange and the New York Stock Exchange—and it expects to sell them a new generation of equipment soon as businesses start to upgrade from 10 gigabit-per-second networks to 40 (and eventually 100) gigabits.
With help from the Highland cash, the company has tripled in staff over the last 18 months to almost 100 people, and will continue to hire sales and business development staff. “We just don’t have enough people out in the field—customers are looking for us,” says Ho.
Currently Gigamon has the network access switch market to itself, and Ho says he’s not worried that Cisco or Juniper might redesign their own equipment in a way that would make Gigamon’s extra plugs unnecessary. “If they had a customer-centric focus and really listened to their customers, they would understand,” says Ho. “But we talked with a couple of Tier One customers for Cisco, and they say they are still selling them million-dollar switches and not listening.”
That kind of talk makes it sound unlikely that the startup’s journey would end with a strategic acquisition by Cisco or Juniper. Ho says the company hasn’t decided yet what the best exit might be for the co-founders and their unofficial CFOs. “You only have three ways,” he says. “One is to build the company like a family business, and I don’t think we can keep doing that. Second is a public offering, and third is M&A. For now we are just trying to build a great company. When the time comes, we will pick the right way.”