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High-powered Ethernet switch maker Woven Systems Inc. has raised $20 million in a Series B round of venture capital led by MDV Mohr Davidow Ventures of Menlo Park, Calif., after holding off six months to commercially launch products it expects will address a burgeoning mass market for specialized computers that operate at 10 gigabits. The four-year-old Santa Clara, Calif.-based company took a $5 million addition last April to its initial $10 million Series A round from Goldman, Sachs & Co. of New York and San Diego's Palomar Ventures in December 2005, with investors offering a premium on the initial valuation to hold off new fundraising until after the company began distributing products. Woven vice president of marketing Derek Granath said the company then began immediately to go to potential new investors with the added benefit of testimonials on initial product trials. Granath said the delay allowed the company to win a strong but undisclosed increase in valuation from the revised valuation of its A round. "Current investors said we should focus on getting in beta customers and actual product trials," Granath said. "We wanted a tier 1 VC, and we definitely had more interest in the round after launching products." Granath said the company did not solicit multiple term sheets for the deal, but negotiated pricing directly with MDV after narrowing the process down. Woven will use the new capital to build sales and marketing and expand to product services as it moves into markets that are new to adopting high-speed computing systems. Ten gigabit systems operating on the industry standard Ethernet connectivity platform, or 10 GE, have been emerging the last several years, and more specialized systems for high-speed computing such as Infiniband and Fibre Channel have been used in markets including storage and scientific computing. But Woven is aiming at a market for high-speed computing at much lower cost that will extend 10 GE performance beyond scientific settings and massive storage systems to enterprise use, particularly in Web services where potential customers are continually adding new servers, and in data centers processing large numbers of transactions, including those in financial services industries. Granath said the new round was targeted to getting the company through 2008 and for the introduction of new products as costs in the overall 10 GE market come down and the roster of potential customers grows. He said part of the company's new initiatives will be to focus on working with systems integrators building 10 GE systems for new adopters. Woven has positioned its product as the industry's highest capacity 10 GE switch, claiming that at a list cost of about $220,000, it can dramatically bring down the cost per port while also reducing power consumption. The company will sell into a rapidly expanding market, where it cites figures from market research firm Dell'Oro Group of Redwood City, Calif., estimating that 10 GE switch sales will grow from $1 billion in 2006 to nearly $5 billion in 2011. Jeff Thermond, who joined Woven as CEO in August as part of the new funding round, said he was attracted to the opportunity by the potential size of the market. Thermond, a longtime veteran of the networking industry, said that after "scores" of successful companies were created in the 1990s, there is reduced opportunity for creating new private companies. As an entrepreneur in residence at MDV, he said he was looking beyond networking and looked at about 200 companies in areas as far afield as cleantech and energy, before joining Woven. "I had a chance to look at a lot of companies, and had three criteria," Thermond said. "Companies had to have an idea that could scale to a quarter billion dollars in sales, a strong team and ideas that were not a one-trick pony but that were built on innovation as a multistage thing that could be built upon." Thermond said the coming widespread adoption of high-speed Ethernet gives Woven the opportunity to meet those demands, and he said the new funding will go a long way to funding growth. Woven did not use an outside financial adviser in putting the round together, and had legal work on the deal from Tom DeFilipps of Wilson Sonsini Goodrich & Rosati PC in Palo Alto, Calif.  Deal Video
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