Nicira: A classic Silicon Valley story, complete with big payday

VMware is buying talent as much as it is tech, but will it all work?

Nicira is a start-up right out of the Silicon Valley playbook with a $1.26 billion ending, in just five years.

VMware's decision, , to buy this network virtualization company will likely be cited as a starring example of why Silicon Valley remains the world's engine of innovation.

The sale has all the classic elements of a Silicon Valley start-up. Whether Nicira can deliver on its promise is now up to VMware, which must make its new technology work with everything else it sells, say analysts. But for the Nicira's founders and investors, their big day has arrived.

Networking virtualization technology is to virtualization what server virtualization was to servers seven or more years ago. It's still new, its market size is still small, but it will grow rapidly because this technology is needed, say analysts. Nicira seemed perfectly timed for it.

The story begins with strong links to the local universities, Stanford and the University of California at Berkeley. Martin Casado, a co-founder and chief technology officer of Nicira, developed much of the initial work and invention while at Stanford.

Other co-founders are Nick McKeown at Stanford, and Scott Shenker at U.C. Berkeley, who is also Nicira's chief scientist. McKeown and Shenker were Casado's doctoral advisers.

The new company set up shop in Palo Alto, Calif., in 2007 and won venture capital backing from Andreessen Horowitz and Lightspeed Venture Partners, among others.

Although the company spent the majority of its life in stealth mode, it attracted some large customers, including eBay, AT&T, NTT and Rackspace. This all led to VMware's decision this week to buy the Palo Alto start-up for $1.05 billion in cash and $210 million of assumed unvested equity awards.

VMware's purchase, and what it paid, "is a huge indicator" that they needed a technology that can help them address the entire network and not just a switch, said Andre Kindness, an analyst at Forrester Research.

Even though a lot data centers have virtualized storage and servers, Kindness said they aren't necessarily getting increased efficiency because the networking requires a lot of manual intervention.

Software-defined networking, which broadly encompasses the technology Nicira makes, enables dynamic creation of networks in much the way same that server virtualization allows users to create virtual machines.

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