Fear of cyber hacks triggers networking startup boom

Bloomberg

Of all the lasting effects of Edward Snowden’s leaks, there’s one photo that leaves a particularly strong mark. In it, US federal employees in T-shirts and blue jeans are seen intercepting network equipment from Cisco Systems Inc. at a shipping facility. The feds in the photo, their faces obscured, were reprogramming the machines to spy on people’s activities. The image captured a deeply held paranoia within Silicon Valley’s biggest internet companies: In an era of increasingly sophisticated nation-state hacking, how can we trust that network infrastructure isn’t compromised before it’s dropped off at the company loading docks?
This fear has created a sense of urgency for Apple Inc., Google, Facebook Inc. and other technology giants that have been devising their own alternatives to Cisco, which controls more than half of the market for network equipment. After the photo was published, Cisco filed a public complaint with the White House, arguing that spying by the National Security Agency was hurting US companies. Cisco told Bloomberg it doesn’t work with governments on backdoors for its products and maintains tight checks on its processes and supply chain to assure customers of their security.
While Cisco’s dominance isn’t in danger of slipping any time soon, the industry’s creeping concerns over cybersecurity have created an opening for new businesses and equipment-design skunkworks inside large companies. In the three years since the Snowden leaks, networking software and equipment startups raised $6.35 billion, a 47 percent increase over the prior three years, according to researcher CB Insights. “We’ve lost confidence in the vendors in the wake of the Snowden revelations, and that is a weakness and an opportunity,” said John Kindervag, a vice president at market analysis firm Forrester Research.
One company that’s benefiting is SnapRoute Inc., which was founded by a former manager of Apple’s global data center network. The startup makes a cheaper, simpler network switch than the ones Cisco sells. And unlike most switches, it’s open-source, allowing customers to look for bugs, performance glitches or backdoors that might allow a government to peek inside. SnapRoute plans to announce a $25 million round of funding Tuesday from AT&T Inc., Microsoft Corp., Lightspeed Venture Partners and Norwest Venture Partners. The startup counts Facebook among its customers.
Facebook is also a founding member of Open Compute Project, which develops and shares open-source data center designs. It launched the project in 2011 after revealing details about a data center it built in Prineville, Oregon, using only Facebook-designed servers, power supplies and backup systems. Alphabet Inc.’s Google, Apple, Goldman Sachs Group Inc. and Microsoft are now members. So is Cisco. It’s playing along with a potential competitor because Cisco Chief Executive Officer Chuck Robbins has said the company needs to be “part of every technology discussion that our customers want to have.”
The high cost of traditional networking products was the main reason for Amazon.com Inc.’s investment into creating its own equipment. “It was cost that caused us to head down our own path,” James Hamilton, vice president and distinguished hardware engineer for Amazon Web Services, said at a conference in November. “Networking gear is really expensive.”
Besides looking to save a lot of money on premium equipment, companies are placing a higher value on transparency. Cisco guards its code and designs, making them difficult to repair when things break. Bloomberg Businessweek reported in September that a web hosting company filed for bankruptcy protection after a series of Cisco switches failed and a major customer left, while Cisco worked for months on a fix. Cisco has declined to comment on that case, saying only that it tries to fix problems quickly.