It’s 8 am in Palo Alto; CA. M&A discussions in Accel Partners are pushing the timelines beyond schedule. Accel Partners and meetings are trickling over the scheduled time as discussions become heated. The discussions involve mergers and acquisitions of their portfolio clients and subsequent bids large companies have offered in an effort to buy them.

Jim Flach, VC at Accel partners who has many years of entrepreneurial experience in the networking domain and now being a partner, wholly knows the field. “Today the market is abuzz with mergers and acquisitions. In such a market being faster, cheaper and superior doesn’t help!” he says. “You need to be really different to get noticed as markets are hot and investments are coming back to networking domain” His claims are justified by the Money Tree Survey, which observeds that investments in network companies have risen from $9.2 billion in 2003 to $10 billion in 2004.

In 2005, investors will are focususing on Voice over IP (VoIP) and video broadband. The market trend is one of a hectic cycle of mergers and acquisitions.

Following the same trend, Procket Systems, cofounded by Indian American Sharad Mehrotra- an Indian American-was recently acquired by Cisco. Procket Systems, that develops who used to develop routers and routing technology, had garnered about 2 percent 2% of the 10G bit/sec routing market by the during first quarter of 2004’s. The stock rapidly appreciated until 2002. He sold his five-year-old start up for $89 million to Cisco because of lack of funding in early quarters of 2004.

Falch’s personal VC insight analyzes the mergers and acquisitions flurry. “Smaller companies find it difficult to sustain their profitable periods for more than six months,” he says. “They are available at lesser valuations, making them an attractive buying option for giants, as its saves time on development of the same product. Sometimes entrepreneurs face difficulties while explaining the value proposition of their innovations. “Venture capitalists have to understand the real value of an upcoming product while it is being developed,” he continues, regarding marketing problems for start-ups. He gives the example of P-cube, which designs, develops and manufactures high network equipment for VoIP, as well as billing and e-commerce real time marketing. “P-cube really had a great product, which we thought could attract a large investment because of its uniqueness. Still it was difficult to convey this to investors!” he claims.

The start-ups are endeavoring in various networking domain areas, such as classical telecommunication networks, enterprise networks and developing areas like wireless networks and network security. Classical telecommunication markets consist of high-speed data and long distance delivery and data processing. Telecom and cable networking players in this field have experienced a difficult period of over capacity and now these networks are transitioning to broadband. Migration to broadband is initializing new sectors for investors like data messaging and data processing. Similarly, the age-old voice devices are being replaced with hybrid devices, processing voice and data.

Devices manufacturers, like modem manufacturers, are a lucrative investment opportunity. Innovations are abundant in wireless networks. Consumer demand is substantial in wireless network infrastructure and wireless consumer applications. Hybrid-type phones are attracting rapid investment, as technology requires high bandwidth transfer of message coupled with wireless date, replacing traditional data-using telephone devices.

Enterprise network software encompasses different things. Traditionally, enterprise networks employ strongly integrated customized networks like LANs, WANs built for a specific purpose. Initially, enterprise software networks were absent from venture capitalists’ radars. The scene changed when Microsoft and HP entered this market, attracting many VCs to the new field. Security is also a thriving field, as the expanding enterprise network is demanding more network security to ensure secure transactions, thus creating a more consumer-oriented outlook.

There are tremendous amount of opportunity in web server intensive applications like data centers, distributed systems, territory based land-switch and security capabilities, resulting from continuous innovation, according to Flach.

Harry Weller, Partner, of NEA (New Enterprise Associates), concurs with Flach, regarding the concept of innovation. He highly emphasizes a particular product’s impact on the whole network “ Venture Capitalists should look for uniqueness and the impact of the application on the whole network management,” he says.

Network application and management are ever-changing with new technology trends and continue adapting to each other, creating a symbiotic relation.

As network applications are improvising their capabilities in speed and packet size, network management must become more efficient. As industry migrates to broadband networks, we require connectors and routers capable of high bandwidth performance and greater transaction speed. Over last two years, much has been invested in network management, since the networks began migrating to broadband. In the network domain, VCs are experimenting with mergers and acquisition route, as they regard it as a better exit option. Due to the fact that large corporations are exhibiting excellent profit margins, this increases value proposition for investors. Another blockade for early exit start-ups are stringent requirements like SOX (Sarbanes Oxley Act of 2002), demanding higher deposit amounts to protect small investors. A start up who can’t comply with SOX regulations is left with acquisition as the only exit.

The M&A trend are not departing. It is an opportune time for a VC to his instinct when investing in a product, which he strongly believes will revamp the market. It’s an era of unique network applications, futuristic valuations and most importantly, that of innovations and acquisitions.