The Most Valuable Startup in the World Is Now Cisco's Biggest Threat

How do you measure the value a company creates? You could look at market capitalization, which would give a familiar list -- Apple , ExxonMobil , General Electric -- but that doesn't fully account for the time it took these companies to reach their eye-popping valuations. When I covered Facebook's IPO in May, I pointed out that Mark Zuckerberg's dorm-founded social site had by that point created about a billion dollars of market capitalization per month of its existence. No one else even came close. Until yesterday.

On Thursday, Business Insider reported that Juniper Networks had bought out software-defined networking start-up Contrail Systems for $176 million. That's not too out of the ordinary in the fast-paced, multibillion-dollar world of high tech. What's most surprising is (as you might have guessed from the headline) the fact that Contrail was (officially) only two days old.

By my calculations, that makes the start-up worth about $2.6 billion per month, well over twice as valuable as pre-IPO Facebook on a value-per-month basis. Contrail never made it that far, of course, but talk about short-term value.


Now, why should that matter to you? Well, if you're invested in any of the competing networking companies, software-defined networking, or SDN, should be of particular interest to you. Contrail's monster two-day payday is just the latest example of a SDN gold rush that looks to pick up serious steam in 2013. In fact, senior Motley Fool technology analyst Eric Bleeker tapped SDN as his "tech trend for the next decade" after virtualization leader VMWare completed its own SDN acquisition, a $1.26 billion buyout of privately held Nicira.

The Business Insider piece also highlighted three other new SDN start-ups raising serious cash. Plumgrid raised $10.7 million in August, Big Switch brought in $25 million in October, and Plexxi went live, five days before Contrail's big payday, with $48 million in its coffers.

As SDN gains steam, it appears that Cisco has the most to lose. The networking leader was already reeling in October from the loss of one of its best SDN architects, who was lured away to head up the tech side of Brocade Communications' service provider division. Fellow Fool Anders Bylund points out that getting SDN right is no easy feat -- Google may be one of the world's most innovative technology companies, but even it had to make use of an established SDN platform to ensure that its operations ran smoothly. If Cisco can't attract and retain top SDN talent, it runs a very real risk of business attrition from its valuable hardware networking products to lower-cost and more adaptable SDN solutions offered by others.

Juniper's buyout is a direct broadside against Cisco's dominance of hardware-based networking. Contrail's products are developed in ways that allow users to control multiple brands of networking equipment, including both Juniper's stuff and Cisco's. If interoperability is no longer important, Cisco's customers may no longer feel obligated to continue using its hardware when others offer the same functionality at a lower cost.

Keep your eye on this space, tech investors. It's already moving at breakneck speed.

Cisco's got a huge threat on its hands now that SDN is exploding. How will the world's leading networking company handle this challenge, and what other issues lie in store for 2013 and beyond? The Fool's top tech analysts have created an exclusive premium research service for Cisco investors, with detailed information and regular updates to keep you ahead of the curve. If you've got questions, or are simply seeking further knowledge, you'll find what you're after in our Cisco premium research reports. Click here to subscribe now.

The article The Most Valuable Startup in the World Is Now Cisco's Biggest Threat originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool owns shares of Google, Cisco Systems, ExxonMobil, Facebook, Apple, and VMware. The Fool has bought calls on Facebook. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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