How Gigamon’s Founders Bootstrapped a Networking Hardware Company to Profitability

Ted Ho, the CEO of Gigamon, jokes that in its early days, the Milpitas, CA-based network appliance maker had four chief financial officers: the founders’ wives. “Every time we would run out of cash, we’d go back to our wives and say ‘Hey CFO, I need more money,” Ho says.

But that’s the way it works when the venture community doesn’t understand your startup: you bootstrap. Gigamon, which makes devices that tap into high-speed corporate data networks so that IT administrators can attach other monitoring equipment, failed to win any venture backing out of the gate in 2004. So for the first two years, it was financed entirely by the founders—and their wives.

In the end, Ho says today, that was probably the best thing that ever happened to the company. It forced the founders down a technological path that made Gigamon’s products both affordable and flexible—with the result that the company has been growing 60 percent year-over-year for the past five years. And that has been a strong enough performance to the push the company into the black.

Being in that fortunate position meant that it wasn’t until late 2009 that Gigamon finally decided to go back on the fundraising trail. “We really didn’t need any money,” Ho says. “But one day we sat down and asked, what is preventing us from growing even faster? It was resources.” This time out, the company was offered multiple term sheets, and in February 2010 it accepted a $22.8 million investment from Highland Capital Partners of Lexington, MA.

You wouldn’t think it was possible, these days, to start a hardware company using just friends-and-family money. And in fact, every time Ho and his co-founders Patrick Leong, King Won, and Thomas Cheung visited Sand Hill Road back in 2004, they’d run into a similar reaction. “We said we needed $2 million,” Ho recounts. “Actually, we thought $1.2 million would be enough but we bumped it up a little. And the VCs would either say ‘We’ve never heard of a hardware company that can start up for less than $10 million,’ or they’d say ‘Hey, I’ll give you $10 million, if you pretty much give up the company.'”

Gigamon's 10GigaPORT-8x

Of course, the founders didn’t want $10 million when they only needed $1.2 million. And this kind of funding gap—created by VCs’ unwillingness to bet small amounts of money in return for small amounts of equity—is exactly what’s enabled the rise of angel investors. But there weren’t as many of those around Silicon Valley when Gigamon was starting out.

What did Ho and his team think they could build for $1.2 million? The idea was for a “data access switch” that would make corporate networks more versatile. To understand why that was such a good idea, you need to know just a bit about networking hardware.

The leading makers of high-speed switches, such and Cisco Systems (NASDAQ: CSCO) and Juniper Networks (NASDAQ: JNPR), compete with each other mainly on performance. As a result, network speeds edge up over time—these days enterprise network switches handle data at blinding rates of 10 gigabits per second or more. But enterprises can’t just let all that data pass by uninspected. For security and compliance purposes, among other reasons, they need to sample and monitor the data. In fact, there’s a whole industry of network monitoring appliance makers who specialize in helping companies do this. But to get the data in the first place, businesses need to … Next Page »

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Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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