Thursday, November 12, 2009

Cavium Buys Montavista

A bit of news got buried by other massive acquisitions this week: Cavium Networks acquired MontaVista Software for $50 million. The offer was comprised of $16 million in cash plus $34 million in stock. It has been reported that MontaVista raised somewhere between $90 million to over $100 million from investors, but browsing the SEC Edgar Database shows $68 million. As I have no idea what I'm doing, its possible I simply missed another $20-30 million in fundraising which isn't so easily discoverable via Edgar. In particular a $3 million C round is awfully small, but that is what the paperwork shows.

  • A round: $31 million from USVP, Alloy Ventures, and James Ready (the founder) closed 5/2002. From the amendments it looks like Alloy put in $5 million of that.
  • B round: $9 million from existing investors, closed 4/2004
  • C round: $3 million from existing investors, closed 1/2005
  • D round: $21 million closed 12/2006, with Siemens Venture Capital joining as a new investor
  • also $2.7 million in 8/2009 and another $1 million in 10/2009, presumably lifeline funding leading up to the Cavium acquisition.

Fistful of DollarsWhy would investors agree to sell the company for $50 million? Presumably, they're just accepting reality. Software support businesses rarely attract venture capital, but Linux was a major buzzword for investors earlier in the decade. The trouble with support as a business model is that expenses grow linearly with revenue: as you add customers, you have to grow headcount to handle them. Expenses for a product company grow at a far slower rate, one can increase sales by 2x while increasing expenses by less than 2x.

So far as I can tell adoption of Linux in the embedded space is still growing robustly, displacing commercial RTOSes. The economic benefit of avoiding a per-unit software royalty is compelling. The expertise to bring up Linux on a new board is quite common now, companies can beef up their own teams rather than pay for support from MontaVista or Wind River.

Update: In the comments teich points out Business Review Online shows a somewhat different funding schedule:

MontaVista   9.0   Series A
MontaVista  23.0   Series B
MontaVista  28.0   Series C
MontaVista  12.0   Series D
MontaVista   3.0   individual investment
MontaVista  21.0   Series E

After the $21 million round, MontaVista appears to have taken in another $3.7 million. Altogether this matches the $100 million quotes elsewhere, though I've no idea why some of these funding events are not in Edgar.