- Cisco is structuring Decibel as an independent firm with additional investment coming from traditional limited partners like foundations and endowments.
- Jon Sakoda, who spent 12 years at New Enterprise Associates, is the founder and head of the firm.
- Decibel has already invested in Blameless, a software company, and security start-up Cmd.
In his first meeting last year with Cisco CEO Chuck Robbins, venture capitalist Jon Sakoda had something important to admit right away — he'd never invested in a networking company.
As it turns out, that worked in his favor.
Robbins was interviewing Sakoda, then a partner at venture firm New Enterprise Associates, for a job that was brand new to Cisco: investing in early-stage start-ups, including those far away from networking.
"I have a team who can do that already," Robbins told CNBC in an interview about the new Cisco-backed fund, Decibel, which launches on Tuesday. "I didn't want him to start there. I wanted him to start in other places looking for opportunities of the future that if you look through a networking lens you may not see."
Cisco, the world's largest maker of switches and routers, is trying to avoid the fate of many legacy technology companies, which tend to lose relevance as modern platforms gain popularity, take market share and zoom past their older rivals.
To grow in new markets, Robbins has orchestrated multiple billion-dollar-plus acquisitions, snapping up emerging companies like software performance management vendor AppDynamics on the eve of its initial public offering in 2017, and identity management company Duo Security last year.
Cisco shareholders have been rewarded for the company's expansion efforts, even with annual sales growth stuck in the mid-single digits, well below Amazon, Alphabet, Salesforce and Microsoft. The stock price is up 24 percent in the past year, and last week climbed to its highest since the dot-com bubble in 2000.
Cisco already has a corporate venture group, Cisco Investments, that invests up to $250 million a year in later-stage companies and plays a part in its dealmaking. But early-stage investing is a different beast, as it often requires writing checks for a couple million dollars or less to smart founders with compelling ideas but little else.
Decibel is designed to go after those opportunities, investing alongside other seed and early-stage funds to give Cisco a window into what's coming in five to 10 years, whether it's in open-source software, automation, security or anything else that affects how businesses buy and use technology.
"The motive for Cisco is — what if Cisco had the ability to see a little bit further into the future?" said Rob Salvagno, a 19-year company veteran who now runs corporate development and investments. "If we have the ability to see it just a little bit ahead of anybody else, that's going to help us make better decisions as a company."
Cisco is setting up Decibel as an independent firm with a separate pool of cash, an unusual model for corporate investors, who typically make investments off their balance sheet. The fund hasn't closed yet, so Cisco isn't talking publicly about the numbers, but a Securities and Exchange Commission filing from October indicated that Sakoda was setting out to raise $500 million.
Cisco is the founding investor and largest limited partner, and the rest of the money is likely to come from the kinds of limited partners that invest in other early-stage venture firms — think endowments and foundations. Sakoda plans to hire other investing partners at the fund over the next year.
Sakoda has been a venture capitalist for 12 years, investing in companies including Uber, Snap, cybersecurity company HackerOne and BlueJeans Network, a provider of video-conferencing systems. After being embedded in the world of start-ups for so long, he admits he was initially skeptical of Cisco's ability to follow through with its plan.
He and Salvagno have known each other for almost 20 years and worked closely in 2005, when Cisco was in talks to buy Sakoda's instant messaging company IMLogic. (Symantec ultimately acquired it in 2006.) The two talked for some time before Sakoda decided to make the jump.
"I remember going home and telling my wife this is a really great idea, I'm just not sure if they're going to do it," Sakoda said. "Every step of the way you wonder if Cisco has the courage and conviction to do this because it's the first time it's ever been tried."
Sakoda was finally convinced of Cisco's long-term commitment to a separate firm and appreciated its willingness to acknowledge that there's so much in the tech world it doesn't understand.
Decibel has already made two investments, which it's just now disclosing. Blameless, a developer of software for site reliability engineers, announced a $20 million round last week from Lightspeed Venture Partners, Accel and strategic investors, one of which was Decibel. In February, cybersecurity start-up Cmd raised $15 million led by Alphabet's GV (formerly Google Ventures), with additional funding from "unnamed strategic investors" — including Decibel.
Sakoda said Decibel took "meaningful parts" of both rounds, though he isn't on either company's board. That's not to say he won't take board seats in the future.
"Sometimes, the earlier you get involved the more important it is that you are a director and the more important it is that you're setting a course for having the right culture and corporate governance at a company," said Sakoda.
"We're also going to partner with everybody and make sure we're focused on what we do best, and that's bringing Cisco to the entrepreneur."
Cisco is jumping deeper into start-up investing at a time when capital is plentiful, and as Silicon Valley enters its second decade of a bull market. Last year, venture firms poured a record $130.9 billion into U.S. deals, almost five times the amount invested in 2009, according to data from PitchBook and the National Venture Capital Association. The bulk of the increase is in the late-stage market, where SoftBank's Vision Fund has been driving up prices and valuations, but even early and angel investments jumped 23 percent last year to $32.1 billion.
In addition to the capital glut, Decibel has to contend with some of the challenges of corporate venture capital.
Venture arms from companies like Alphabet, Salesforce, Intel, Qualcomm and Comcast (CNBC's parent) help start-ups plug new technologies into their sales and marketing engines and give them a ready-made slate of customers.
But entrepreneurs can be nervous about handing over trade secrets to a big company that could potentially launch a rival service or buy a competitor.
By placing Decibel in the hands of an independent entity and separate management team, Cisco is trying to provide access to all the strategic benefits while walling off sensitive financials and intellectual property.
"I'm sure as we go down our path we'll run into situations where there will be concerns that arise," said Robbins, who was elevated to CEO in 2015. "I think more often than not it will be positive."
In Sakoda's view, one of Decibel's biggest advantages is access to mentors. Cisco employs a ton of founders whose start-ups were acquired over the years and who plan to act as advisers to entrepreneurs in Decibel's portfolio.
For example, Duo co-founder and technology chief Jon Oberheide, who sold his company to Cisco for over $2 billion last year, is already working with the Cmd team, while Bhaskar Sunkara, chief technology officer and co-founder of AppDynamics, is advising Blameless.
Earlier this month, Cisco hosted a dinner during the RSA Conference, a major event for the cybersecurity industry. At Credo, an Italian restaurant in San Francisco's financial district, Oberheide and about 35 founders came together for what Sakoda called a "founders helping founders" event.
"It was an awesome mind meld of talent and brain power and passion," said Oberheide, whose co-founder, Dug Song, was also there. "Just out of that dinner alone, I was making connections to other Cisco teams, resources and founders. It was very different than what everyone expected from a VC RSA dinner."
Last week, Sakoda hosted another event at the One Market restaurant in San Francisco for about 80 engineering leaders who work in the AppDynamics ecosystem. The company's technology is used by developers to monitor all of their applications and pinpoint bugs as soon as they arise.
It's all part of building a different kind of brand for Cisco, one that revolves around supporting entrepreneurs and developers, as opposed to a company that just sells big expensive boxes.
"There was a period of time when the pace of innovation was such that large tech companies felt like, 'we have it all covered,'" Sakoda said. "When a company decides that what's going on outside its four walls is as interesting as what's going on inside its four walls is when it has the opportunity to partner with entrepreneurs earlier and together invent the future."