RGB Raises $20 Million, Eyes Mid-2009 IPO

Jef Graham is ready for his closeup.

The CEO of RGB Networks claims the video-processing company grew annual sales 72% in 2007, with product shipments totaling $31 million for the year. Graham is targeting a run rate of more than $50 million for 2008.

And now, RGB has put more money in the bank, which Graham said will let it become “aggressive” in the market in taking on big guns like Motorola and Cisco Systems.

The company is expected to announce this week that it has raised $20 million in fourth-round funding, giving RGB a valuation of $200 million — an 82% increase over its $110 million valuation in June 2006.

The round, which gives RGB a total of $57 million raised, was led by new investor Institutional Venture Partners, and RGB's previous backers also participated: Accel Partners, Comcast Interactive Capital, Kleiner Perkins Caufield & Byers and Focus Ventures.

The “innovation and revenue growth” that RGB has demonstrated is “particularly noteworthy for a young company in the current business climate, and is a tribute to their superb technical team and their experienced management,” Kleiner Perkins partner William R. Hearst III said in a prepared statement.

Graham said roughly half of the new funds will be used “for sustainability” before the company launches an initial public offering, which he said is currently being considered for mid-2009.

Today, he said, “the IPO market has absolutely tanked.”

Graham pointed to the March 2007 initial public offering of BigBand Networks, an RGB competitor. BigBand quickly rocketed up to a valuation of more than $1 billion, but has since dipped to a market capitalization of around $380 million.

BigBand's decline came after it told investors it would miss third-quarter expectations because of longer-than-expected deployment times at some key customer sites.

As RGB sets its sights on an IPO, Graham is looking to diversify the company's revenue base, to address multiple geographies, product lines and customer segments.

“We're very focused on being a global video player,” Graham said. The latest round of funding “will also allow us to be aggressive — we can hire more salespeople; if there's a product line I see that we want to go after we can do that.”

He claims RGB is already fairly well diversified: In 2007, the company's single-largest customer — Charter Communications — represented 20% of revenue.

And Graham hopes to grow business outside North America. Of RGB's 125 employees, 100 are based in Sunnyvale, Calif., and the rest are sales-and-support staffers based in Canada, the United Kingdom, Brazil and China.

The goal is to expand product offerings beyond the cable industry, too. Graham wants future products to target satellite and telco TV operators, as well as wireless and Internet portal players.

For example, this summer RGB expects to begin shipping a product designed for the telco market, the Modular Video Processor (MVP), which is able to deliver MPEG-4 video streams in a telco-hardened chassis.

Cable, though, remains RGB's key market.

And it has new products for cable operators, too, such as its Broadcast Network Processor (BNP), which can insert graphics, text or video into up to 500 channels simultaneously. Comcast recently cleared the BNP for deployment, and Time Warner Cable approved the system for digital ad insertion.

Also, RGB this quarter expects to begin shipping the Dynamic Bandwidth Manager (DBM), which is supposed to pack 50% more video-on-demand streams into the same amount of spectrum using video-optimization techniques.

A big challenge for RGB, Graham conceded, is getting beaten by the larger incumbent players: Motorola and Cisco's Service Provider Video Technology Group (formerly Scientific Atlanta).

“They can say, 'I'll give you the equivalent of the RGB product for free,' ” he said. “That's been a classic strategy by Cisco in the enterprise space.”

Graham has a history of butting heads with Cisco as a competitor. He joined RGB in March 2006 from Juniper Networks, where he was executive vice president of the Application Products Group. Juniper in 2005 acquired Peribit Networks, a wide-area-network optimization startup, where Graham had been CEO, and prior to that he was at 3Com.

Juniper showed that best-in-class products can beat incumbents, according to Graham.

“Carriers buy best in class, especially when best in class is a quantum leap over what's available,” he said.

And, down the road, Graham envisions that adoption of new technologies — such as addressable and interactive TV advertising — will give RGB plenty of runway to compete against Motorola and Cisco.

“Cable owns the eyeballs, and as they start targeting those [with interactive advertising] I think their share of advertising will increase,” he said.