Cobalt Raises $36M in Series C Round

Hoping to file for an initial public offering within the next 12 months, Cobalt Networks Inc. recently raised $36 million in its third and likely final round of private equity financing.

The Mountain View, Calif.-based company develops network server appliances for Internet service providers (ISPs), small to mid-size businesses and branch offices.

August Capital led the round, which was placed by BT Alex Brown, with a $10 million investment. Other first time investors include Van Wagoner Capital, General Electric Pension Trust, J&W Seligman and Pequot Private Equity Fund LP.

Chief Executive Stephen DeWitt said the company’s existing investors returned for at least pro rata stakes. These investors include Chase Capital, TechFund Capital, Vanguard, Crystal Internet Venture Fund, NTT Leasing and French Telecom Innovacom.

Cobalt has raised more than $50 million in private equity financing since closing its first institutional round in October 1996.

“We took more capital than we initially set out to do,” said DeWitt. “We will move quickly to continue to establish a presence outside the United States.”

In addition to being equity holders, French Telecom and Japan-based NTT are Cobalt’s regional distribution partners. DeWitt said this distribution strategy is similar to that of Cisco Systems, where he had served as vice president of the Enterprise Network Management Unit prior to joining Cobalt in 1998.

DeWitt said the ISP market accounts for approximately 50% of Cobalt’s revenues.

“The ISP market is growing by leaps and bounds,” he said. “Each one wants to differentiate and come up with unique hosting solutions for their customers.”

Prior to its investment, August Capital had been a customer of Cobalt. General Partner David Marquardt said he began to view Cobalt as an attractive investment candidate after installing its technology at home in order to connect his family to e-mail.

“I pulled it out of the box, and within 15 minutes e-mail was up and running,” he said. “When I heard that they were looking to raise money, I figured it would be an attractive investment.”

The investment was made out of August Capital Partners II, a $195 million fund that has committed approximately $65 million since December.

DeWitt said his company still “must hit a tremendous number of internal milestones before an IPO,” and would return to private financing if market conditions prove to be unfavorable.