Editor’s note: In advance of the CED’s Venture 2002 event April 30-May 1, Local Tech Wire is featuring profiles of firms that chose to participate in an LTW survey.In these days when telephone companies are drastically reducing the amount of capital being spent on new hardware, LVL7 Systems believes it can help the hardware builders pare costs.

LVL7 markets a proprietary, trademarked software called FASTPATH that it says helps accelerate development of new equipment and also reduce costs. Utilizing what it calls “microcode device drivers” that took “70 person years to develop”, LVL7 already has made a number of sales while filing for numerous patents.

With $5 million in revenue for the fourth quarter of 2001 in hand, LVL7 is intent on being profitable by fourth quarter this year. And investors at Venture 2002 will hear company executives with more than 100 years collective experience in networking make a pitch for $10 million. Kishore Jotwani, vice president of marketing, says LVL7 will use the money to expand its sales and marketing efforts as well as to exploit other vertical markets.

LVL7 believes that the market for third-party software in the networking sector will “increase ten-fold to $1.3 billion by 2004,” Jotwani says. “LVL7 is positioned to be the leading player in this market.”

“Traditionally, network equipment manufacturing companies have relied on internal resources to develop and optimize all the software required to build complex enterprise and Internet focused products,” he explains. “Meeting the ever-increasing requirements of Internet industry standards (IETF, IEEE, NP Forum, etc.) and growing customer expectations has made it difficult for networking vendors to develop a cost effective, high performance solution.”

The company, which was founded in 1999, already has more than 60 employees and began shipping products last fall. LVL7 acknowledges receiving $10 million in venture funding thus far, and an executive recently told Local Tech Wire that the company expected to close on an additional $15 million in the first quarter of this year.

Q&A with LVL7:

Answers provided by Kishore Jotwani, vice president of marketing

Times are tough. If you had only one chance and one paragraph to convince an investor, how would you answer this question: “Why should an investor choose your company?”

LVL7 has a clear path to profitability with a compelling return on investment. This has resulted in tremendous customer traction for our networking software platform and products. LVL7 Systems stands alone in the third-party network processing software market as the only company to provide a complete, system-tested and flexible architecture framework with its FASTPATH software product. Through partnerships with leading silicon vendor companies, LVL7 has positioned its proprietary software as the smart choice for network equipment vendors building intelligent infrastructure products for the enterprise, metro and access markets. LVL7’s FASTPATH• software helps customers increase profits, improve operational efficiencies and reduce time-to-market.

What makes your company unique? Do you have a proprietary and/or a patented technology? Please explain why it is unique and what the status is of any patent filings.

LVL7 has developed a proprietary FASTPATH• software that includes a proven and tested networking architecture framework specifically designed and implemented for network processing and networking silicon. LVL7 provides a scalable networking systems platform and associated networking applications, protocols and management. Traditionally, network equipment manufacturing companies have relied on internal resources to develop and optimize all the software required to build complex enterprise and Internet focused products. Meeting the ever-increasing requirements of Internet industry standards (IETF, IEEE, NP Forum, etc.) and growing customer expectations has made it difficult for networking vendors to develop a cost effective, high performance solution.

Further, next generation silicon, including services-enabling advanced Application Specific Integrated Circuits (ASICs) and programmable Network Processors (NPs) require critical low-level software including device drivers, assembly and microcode for efficient performance of network infrastructure products. Specifically, development of NP software requires specialized, complex programming skills…skills and products that are found at LVL7 Systems.

LVL7 is the only company in the market that has productized the low level microcode / device drivers and corresponding Internet protocols for various networking silicon chips. This has only been possible by the unique FASTPATH architecture that was developed to be operating system and silicon independent. It took 70 person years to develop this solution, and number of patents have been filed by LVL7 in the networking systems software arena based on inherent technology developed for FASTPATH. LVL7’s teams of programmers and engineers have more than over 500 years of experience in networking software architecture, product design, development, shipping and supporting NP and ASIC/ASSP based networking products.

What makes your product(s) and/or services unique vs. your competition? (Who is your competition, and what do they offer?) If you have no competition, why not?

One of the key differentiators of FASTPATH software products is the delivery of a completely tested system solution. Unlike individual software companies that provide a single ‘shrink wrapped’ networking protocol stack, LVL7 provides a silicon and OS independent networking platform with associated low level code (device drivers/microcode), and application and management software to provide an integrated, system tested solution for various networking silicon and operating systems. This uniquely positions LVL7 as the only software vendor providing a complete networking system software offering for various enterprise and telecom vertical markets. This saves equipment vendors $800K — $1.5M in development.

While several players are intent on capturing a share of the rapidly growing network processing software market, few companies have the expertise to successfully compete.
Internal development within established networking companies is the real competition (i.e. make versus buy decision making). But as systems get more complex and standards change or are upgraded, networking companies building embedded networking systems are buying third party software technology. LVL7’s complete FASTPATH software offers customers the option of integrating their own intellectual property to the platform, which helps differentiate them in the market through specialized services and products.

LVL7 competes with a couple of companies including WindRiver and Radlan, that provide software kits or “shrink wrapped offerings” to the market. LVL7 provides a broader range of flexible and customizable software including the network processing microcode, and is therefore, unique in the industry. The company stands alone as the early leader in the industry with a software platform that is operating system and silicon independent.

Does your company already generate revenue? If so, how much? Are you cash flow positive?

LVL7 Systems is a private company that has generated revenue since day one of launching our product. The company continues to capture multiple design wins and gain tremendous customer traction. The LVL7 team is focused on achieving profitability in late 2002.

What is your target market? What is the size of that market in terms of dollars? What share of that market do you believe you can win?

LVL7 today provides software for the networking infrastructure Ethernet/Internet protocol market. The market for third party software for the Network Processor and ASIC/ASSP industry is one of the fastest growing software markets today and is expected to grow ten-fold to $1.3 billion by 2004 from the current level of approximately $130 million. LVL7 is positioned to be the leading player in this market.

What will you do with the invested funds? What is the timeline for product delivery? If you have existing products and services, how will additional funding help you expand your company, if that is the intention, or will you develop new products?

LVL7 has been shipping product since the 4th quarter of 2001. The strong silicon partnerships in place have allowed LVL7 to gain tremendous traction with customers. Funding obtained would be invested in expanding the sales and marketing organization and growing internationally. Financial backing will be leveraged to expand our technology solution to other vertical markets faster to further position LVL7 as the most comprehensive network software systems provider in the communication networking industry.

What do you want from an investor other than money?

LVL7 is interested in partnering with an experienced private equity group that can help the management team capitalize on the market opportunities through a knowledge of the networking industry and the ability to provide input into strategic decision making for optimal company expansion and growth. The ideal investor for LVL7, would have domain and business expertise within the networking systems, software and semiconductor markets gained from industry experience and portfolio companies.

Why will investors be impressed with your management team?
LVL7’s management team has over 100 years of experience in the networking industry and has launched over 150 networking products. The team has extensive backgrounds in the software, silicon, equipment, and sales channels aspects of the networking industry.

The management team has successfully positioned the company as the leader in network processing software; a position earned through the company’s technical excellence and intelligent business development strategy. In the six months since the launch of FASTPATH, LVL7 has established credibility with silicon and operating system vendors who are now Smart Start partners of LVL7 and who help promote the product globally, increasing market penetration for both partners.

What is the exit strategy for the investor from your company? Are there potential strategic alliances with larger companies? Do you wish to take the company public? Or do you wish to grow the company and either sell it or acquire other companies?

LVL7 is focused on achieving profitability. The option to go public would be a logical next step but at this time the team is focused on working smart, acquiring customers and growing value. LVL7 believes that an IPO is an excellent exit vehicle for investors. The revenue, profit, customer base, partnerships and high growth market that LVL7 participates in will provide shareholders with an attractive exit vehicle. In addition, the real and intrinsic value of the LVL7 software intellectual property, the experienced team and skills, strategic technology and customer relationships makes LVL7 an attractive candidate for an acquisition too.

What do you want to see in a term sheet? What would you consider “fair”?
You mean besides cash and a fantastic valuation J!!! We look at VCs as partners who naturally want to see their investment grow. What we would expect is a mutual understanding that when they invest in LVL7 they become an integral part of the company and that we’d rely on them to help execute our goal of dominating the networking software processing market.

How do you really feel about venture capitalists and bankers?

Since March 1999 LVL7 has been funded by corporate investors and private seed capital. LVL7 is now approaching VCs for money since we feel that besides liquidity they will provide value in helping position the company strategically for the growth that we are experiencing. At this time the focus has been in engaging with VCs who either have domain expertise or industry experience within their portfolio companies with networking software, systems and semiconductor companies.

LVL7 SYSTEMS FACT BOX

TYPE OF COMPANY: Networking Infrastructure Software

ADDRESS:13000 Weston Parkway, Suite 105 Cary, NC 27513

PHONE NUMBER: (919) 876-2700

WEB SITE: www.LVL7.com

MANAGEMENT TEAM MEMBERS:

President and Co-Founder: Ernest Baker
Vice-President of Business Development: Erik Dixon
Vice-President of Marketing: Kishore Jotwani
Vice-President of Development: Geoffrey Bula

BOARD MEMBERS:

President and Co-Founder: Ernest Baker
Vice-President of Business Development: Erik Dixon
Vice-President of Development: Geoffrey Bula
John Teegen, founding partner of Azure Domain

INVESTORS: Corporate: Accton Technology Corporation; AMCC Networks, Inc; plus Private Investor

COMPANY MISSION STATEMENT: LVL7’s mission is to provide quality, proven, complete and market-leading network processing software solutions to its customers through its commitment to excellence in every level of its business.

REVENUES:Private company; not disclosed.

YEAR ESTABLISHED: 1999

NUMBER OF EMPLOYEES: 60+ employees

Thursday’s profile: Overture Networks