Big guns pour bucks into startup

Electronic News, August 11, 1997 by Carol Haber

Campbell, Calif.--Packeteer has received an additional $4.5 million in financing, bringing its total funding to $10 million. The company's intitial product is called PacketShaper, which is aimed at "Internet crowd control" by allocating bandwidth in terms of priority--a problem that is intensifying with the commercialization of the Internet.

New funds are aimed at the international arena, where bandwidth is scarce and costly.

While targeting an important problem with a unique technology, Packeteer also may be shining in the reflected light of some of its backers. Driving the company, which got its first financing in February 1996, are some heavy hitters.

For example, private investors are Steve Campbell, founding president of StrataCom, Inc.; and John Graziano, a former CFO at Apple Computer and Sun Microsystems. Both supplied seed funding. William Stensrud, a general partner in Enterprise Partners--which provided the second round of funding along with previous investors--has joined Packeteer's board. Mr. Stensrud has founded and/or served as CEO of three high-tech startups, including StrataCom and Primary Access Corp., which were ultimately acquired by Cisco Systems and 3Com, Inc. respectively, for a combined value of more than $4 billion.

Observers have pointed to Packeteer as a company ripe for acquisition with an easily transferrable technology that doesn't replace any existing device, and which is tackling an increasingly important problem. But, according to company executives and at least one Wall Street analyst, even more likely is an initial public offer--sometime in 1998.

No third round of private financing is anticipated now. Until the possible IPO, "We have our heads down and are building the business," Packeteer executives told Electronic News.

The company's major customers are Internet service providers and corporate customers managing wide area networks (WANs). New products, all aimed at bandwidth allocation, are in the works, with announcements expected in the next few months.

The company hopes to help prioritize mission-critical traffic so it is not interfered with by less critical traffic, such as casual web surfing, especially in Europe and Asia.

"The need for bandwidth allocation and prioritization has become widespread, especially with the advent of 'push' applications that are flooding networks everywhere," said Packeteer President/CEO Craig Elliott in a prepared statement. "But in Europe and Asia, where wide-area and Internet connections typically are much slower and much more expensive than in the U.S., reducing the 'world wide wait' is even more critical."

PacketShaper, which costs $7,250, is a rack-mountable network device, and is located on the local area network (LAN) side of the access router. It uses an AMD 586 processor and SanDisk flash memory. The low cost of the semiconductor components were crucial in coming up with a viable price/performance ratio, a spokesperson for the company noted. A version using a Pentium chipset is forthcoming. The device manages bandwidth by managing the TCP/IP protocol.

Noted analyst Eric Zimitz of Hambrecht & Quist, "They have a very important solution to a very pressing problem. The idea of managing bandwidth on the Internet. Given the desire of both organizations and carriers to try to leverage the Internet for commercial benefit, these sort of products are becoming increasingly important. The Internet is a fairly chaotic place to operate and without the sort of technology that allows you to control it, you are unlikely to leverage it to its full extent commercially. It allows organizations to provide consistent quality of service and establish bandwidth service."

Regarding any possible buyout, "They have a unique set of skills that could be applicable to a spectrum of technology companies. That ranges from potentially being used to enhance networking devices, a firewall, or an operating system. Such companies could have direct interest in acquiring Packeteer or licensing the technology and just incorporating parts of it into their products."

Meanwhile, Mr. Stensrud said to EN: "Bandwidth bottlenecks are a huge opportunity and we see our technology and services going in that direction. We are planning other products in this area and will be making some announcements within the next few months, but bandwidth management is the core technology."

So far, for Packeteer, Japan has been especially successful; "good success" was seen in Europe, and the firm is "just getting started" in Australia and New Zealand.

The initial product, PacketShaper, has been shipping since February 1997.

Packeteer has all the signs of a winner, according to Mr. Stensrud, whose stints at StrataCom and Primary Access may make him privvy to what works.

His recipe: "First, address a very real market need; then, have a great idea, and finally, run with it like hell." Don't let the copycats catch up, he warns. Packeteer has lived up to all the criteria, he noted.

Key competitors for the new company? Simply, "The people who have the option to buy more bandwidth," said Mr. Elliott to EN, adding "It is sometimes very simple to over-engineer your network." Mr. Elliott joined Packeteer after 10 years at Apple Computer.