Arrcus snaps up $50M for a software-based alternative to costly network router equipment

Software may be eating the world, but it’s all still largely running across very physical, and often very expensive, equipment. That is now slowly starting to change, though. Today, a startup called Arrcus — which has built a software alternative for carriers and other major connectivity users looking for more flexible, and cheaper solutions to run those networks — is announcing $50 million in funding after seeing a year of strong growth for its business, money that it will use to continue expanding into more networking products covering 5G, multi-cloud networking and data center switching, as well as to bring on more customers, CEO Shekar Ayyar said in an interview.

One of those new customers is coming in the form of the lead investor in this round. The Series D is being led by Prosperity7, the investment arm of petrochemical giant Aramco (aka the Saudi Arabian Oil Company), who is coming on as a strategic investor.

Previous backers Clear Ventures, General Catalyst, Liberty Global and Lightspeed are also participating, alongside Silicon Valley Bank. The company saw its revenues grow 100% in the last year, and its valuation is now at $400 million, double its $200 million valuation from its $28 million Series C in 2021. It has raised $126 million to date.

Aramco’s involvement in the round speaks to the addressable market for technology like Arrcus’s. Traditionally, telecoms carriers have been the primary buyers of network switches and routers, used to manage and carry fixed, mobile and broadband traffic between their core networks and out to consumers and other end users. Usage of those networks has exploded in the last couple of decades with the arrival of broadband and wireless services, and that’s led to more investment in that infrastructure.

It’s also led an increasing number of larger enterprises to take on more network management themselves to run and manage their own communications usage, creating a second market for telecoms vendors, hence the Aramco’s of the world (along with big banks, big technology companies and others) coming on as users as well.

But for the most part that business has been tied up by just a handful of companies led by Cisco, Juniper and Arista, which have built “boxes” that comprise switches and other physical components coupled with software, which is not something that invites third-party tooling or much in the way of disruption and price competition.

“Fundamentally, this is a very large marketplace that’s controlled by two or three incumbents, and when you have lack of competition you get all of the traditional bad behavior that comes along with that, including muted innovation, rigidity in terms of the solutions that are provided and these legacy procurement models, where there’s not much flexibility with artificially high pricing,” founder and former CEO Devesh Garg told TechCrunch back in 2019, when Arrcus was raising its Series B.

That is a sentiment and hegemony that largely still holds true today, said Ayyar, and it means that in fact “disruptive” approaches like this one still account for a very small part of the overall market.

“Networking equipment is an $80 billion market, but not even 1% of that is served by software-defined technology today,” he said.

That speaks to an opportunity but also a challenge for Arrcus, as well as competitors like DriveNets, which raised a whopping $262 million last year for its own software-based networking alternative to routers and switches.

Ayyar believes that the opportunity for Arrcus is not in catering to updating existing networks — if it ain’t broke, telcos will never fix it — but to step in for the next generation of networking. In particular, he sees opportunities today in working with carriers and others operating 5G networks, which were super expensive to build, and are now super-expensive to operate, yet the owners of them are now under a lot of pressure to run services over them and monetize those assets.

“In practice, it’s not a rip and replace, but an evolution of network architecture as it proceeds forward,” he said.

The sell is compelling, he added, because Arrcus’s approach — based around its ArcOS platform, which runs on generic dumb routers supplied by smaller providers — is significantly cheaper.

“Cost reduction is super important, and technolgy like ours showcases how carriers and enterprises can get 30-40% cost reduction over legacy equipment,” he said. “The software plus box approach is cheaper to purchase and cheaper to maintain.”

So while Arrcus and others in its space are still just biting off a tiny piece of what is out there to chew, the belief is that their new business will continue to grow and will account for more of what’s invested in the future by these telcos and large enterprises.

“Modern networks that can flexibly leverage private infrastructure as well as public clouds and 5G will be key to unlocking the fourth industrial revolution and driving the next wave of digital transformation in critical industries that power the world,” said Aysar Tayeb, executive managing director of Prosperity7, in a statement. “We believe Arrcus is a disruptive leader in next generation network infrastructure that is software defined, flexile, programmable and efficient; and we are excited to support the company and its distinguished team.”