The New Sultans Of Cyberspace

Cover Story: Information Technology Annual Report

Making computer networks live up to their promise is no mean feat. But entrepreneurs who tackle the problem stand to make a fortune. Take Cisco Systems Inc. A decade ago, it came up with a way to make local-area networks (LANs) talk to one another. In 1987, veteran Silicon Valley investor Don Valentine of Sequoia Capital plunked down $2.5 million on the outfit and the investment grew more than a thousandfold.

That rocket ride may be hard to match. Still, analysts and venture capitalists see roaring growth for companies that can upgrade the existing generation of network equipment. Hot groupware programs along the lines of Lotus Development Corp.'s Notes could also be a gold mine. And nearly everyone is romancing the Internet. "The party isn't over," says Valentine.

The most obvious plays are companies that can unsnarl digital traffic jams on LANs. Each year, as desktop computers get more powerful, the files they exchange get bigger and gobble up more bandwidth. To prevent bottlenecks, network companies are pushing a new generation of switching gear that breaks LANs into segments and then moves packets of data from one to the next.

HIGH-SPEED SWITCHING. So-called Ethernet switches speed things up. So does a newer approach called "asynchronous transfer mode" (ATM), which can switch up to 622 million bits of data per second. Dozens of companies are selling such upgrades. "Switching is the hot word in the LAN area," says venture capitalist Geoffrey Y. Yang at Institutional Venture Partners in Menlo Park, Calif. Network Peripherals in Milpitas, Calif., which makes such gear, went public last June and has since grown over 100% each quarter. Yang also likes Grand Junction Networks Inc. over in Fremont, which may go public by yearend.

Another opportunity: "smart" LANs that analyze traffic to break up jams. Agile Networks in Boxborough, Mass., has combined Ethernet LAN technology and ATM switching in one box, along with software "that automatically connects groups of users, wherever they are," says founder William M. Seifert.

One reason analysts like Agile is Seifert's track record. The 45-year-old CEO developed the first routers sold by Wellfleet Communications Systems, which later merged with SynOptics to form giant Bay Networks. Today, network users have installed faster desktop computers, but LANs haven't kept pace. By narrowing the speed gap, Agile's new LANs "are changing the paradigm in networking," says customer Jeff Marshall, a Bear, Sterns & Co. senior managing director.

Connecting networks between cities poses other problems--and opportunities. Phone companies have plenty of high-capacity fiber-optic lines. But most of their switching gear was designed for voice traffic, where each call needs a separate connection. Computer users don't need such dedicated circuits. So carriers are shifting to new approaches, such as ATM and frame relay, which chop messages into packets and move them in bursts. Frame-relay products and services alone will soar from $800 million last year to $2.8 billion in 1996, predicts Vertical Systems Group Inc. in Dedham, Mass. That's flooding the coffers of Cascade Communications in Westford, Mass., and StrataCom Inc. in San Jose, Calif.

NOVEL SOFTWARE. Simplification is the order of the day. Keeping up with the flood of data pouring into a corporate network used to require a tangle of terminal adapters and a closet full of lines. "It was a management nightmare," says venture capitalist James Lally of Kleiner Perkins Caufield & Byers in Menlo Park. That's why his company invested in Ascend Communications Inc., which has novel software for aggregating incoming data and funneling it to a LAN. Ascend's solution: a sleek, modem-size box that connects to an ISDN line. The outfit racked up sales of $20 million in the first quarter of '95. Its shares, listed in May, 1994, have increased in value sixfold.

The magic word now for investors is "Internet." Stocks of newly listed access providers, such as Netcom Online Communication Services, have skyrocketed. And investors are abuzz over a possible initial public offering this year from Netscape. Launched by Silicon Graphics Inc. founder James H. Clark, it makes software to cruise the World Wide Web.

There's an Internet play for every taste--from Golfweb to Vocaltec, which lets Net surfers make long-distance phone calls. Says Institutional Venture's Yang: "Any IPO that's related to the Internet is hotter than a pistol." Who knows? One could be the next Cisco.

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