Gregers' war story: If you can't beat them, buy them
While technology development is a task, gaining business traction is often an art
Search for Napatech on the internet, and you'll find that the company is developing "programmable network adapters". What is that ? Well, it is like the Ethernet network adapters/cards (or chips) that we all have in our desktop computers and notebooks and connect us to the company or home LAN. Such network adapters are manufactured in Asia at very low prices and terrible margins.
Believe it or not, in the mid-90's when this technology was new, Denmark had a couple of the world leaders ScaNet developed Ethernet network adapters and Internet routers, at a time when it was still not possible to tell whether ScaNet or Cisco would become the ehhrm...Cisco of this world. ScaNet was acquired several times and ended up as Intels networking division.
Another danish company, Olicom developed network adapters for the competing Token Ring standard that was invented by IBM, while Olicom was no. 1 competitor to IBM and offering better performance.
The companies may have disappeared from the Danish scene, but the people behind them remain. And thus it was that Napatech was founded by former Olicom tech wiz Jens Christophersen and the correspondingly talented Olicom sales guy Thomas Jørgensen.
The duo envisaged early on that select high end applications would eventually need support from intelligent network adapters that takes care of certain key functions in real time as the traffic enters the pc. Basically a hardware offload of a hitherto software based application. The vision was based on the fact that network traffic speed is increasing faster than CPU speed, memory access speed and computer bus speed. The network speeds we are talking about here are multiples of 1G bit and 10G bit and beyond. Yes, we're talking speed levels where only very few teams in the world can participate meaningfully. Both for this reason and because the applications in need of Napatech's solutions do not sell in the millions, but in the tens of thousands, this market is unlikely to be commoditized any time soon as traffic speeds move to 40G bit and 100G bit per second. This vision and background analysis was and is spot on and real. Napatech was and is highly justified.
Napatech spend the first few years developing and maturing a product portfolio of 1G and 10G products with various optical and electrical interfaces to serve a number of future OEM customers, Customers with the application specific knowledge building servers for traffic monitoring, intrusion detection and prevention, lawful intercept, traffic recording, network traffic management etc. etc.
Napatech was clearly ahead of competition. In particular with its 10G product line-up.
I often say that developing a product is not that big of a challenge for good engineers, merely a task … at least not in the Nordics. But, bringing a product successfully into the market can be quite a challenge, and laugh if you want to, but sometimes it's almost an art.
While Napatech entertained dialogue with many of the market leaders in need for Napatech's solutions and had trials ongoing, it was cumbersome to convert the clear interest into design wins and purchase orders. During this period Henrik Brill Jensen joined as CEO to augment the team with his operational and business experience, and Erik Norup also from the former COCOM team joined the board to help coach on business development efforts. But still no breakthrough.
And as often happens Napatech began to loose investor confidence and ran out of money.
Clearly, it was time to think outside of the box.
The problem was - as it often is - that many customers were hesitant to work with start-up Napatech and preferred to work with the larger competitor Xyratex, a $600 mill. revenue company at the time. However, Xyratex had not presented a 10G next generation product, and had no real product development going in that direction. Nevertheless, the customers were still hopeful that Xyratex would eventually crank out such a product.
We've seen so often how the innovative start-up with the new technology is acquired by larger market leaders. This was however not an option with Xyratex as the network adapter business, while significant and profitable, was much smaller and less strategic than Xyratex' mail business. So, Xyratex was not the possible acquirer. And while they were behind on the next generation technology, they still unintentionally stalled Napatech's business development.
The million dollar question was therefore: Could we turn the tables? As Xyratex clearly had more important business to focus upon, maybe they would be interested in selling the adapter business? A tantalizing thought and I immediately started searching the executive management team and the board for inroads. It appeared that one board member had in a former position been a co-investor with Northzone in venture success Stepstone. On that background and introduction by colleague Bjørn Stray was made, and a conference call setup. The idea to acquired the Xyratex adapter business was presented. After a couple of months waiting time Xyratex came back and said they were interested, and a process was initiated.
The parties ended up agreeing to a deal where Napatech acquired technology, products and customers designs, which over night made Napatech the market leader from being a struggling start-up. Customers were somewhat surprised at first, when the news was presented, but they quickly understood, that everything considered, this action would secure them a strong and innovative source of these critical solutions going forward.
To get to the happy ending, a financing round also had to fall in place ... and at the same time, since the acquisition was financially demanding, to say the least. After a fairly short process Ferd Ventures led a B round and joined Northzone as main investors. As it often is - it was a close call but this time with a happy ending.
Napatech is today market leader in intelligent network adapters serving market leading customers within several verticals. Napatech is – as envisioned early on - riding some very strong industry trends and has demonstrated strong financial performance over several years and is growing both top and bottom line very fast.
