The “mysterious” company that sold for $1 billion

July 24, 2012, 2:34 PM UTC

By Richard Nieva, reporter

Martin Casado.
FORTUNE — On Monday, VMware — the “server virtualization” company which makes software that allows multiple operating systems to run on one machine — announced a $1.05 billion deal to acquire Palo Alto-based startup Nicira.

But what is Nicira exactly? If it’s still a mystery to you, that’s perfectly natural. One, its focus is “network virtualization,” a sect of computing infrastructure that is so nascent it’s not even on the radar of many research analysts. (The short answer is, the company produces software that makes data centers less reliant on old-line routers and switches.) And two, its founder Martin Casado is a former intelligence agent, so a certain mystery and mystique comes with the territory. (Fortune profiled the company in April.)

In addition to the cash transaction, Nicira will receive about $210 million in equity rewards. While nothing has been officially decided, Martin Casado, Nicira’s cofounder, said he expects to continue his role as technology chief for his team, probably in a software architect role. The Nicira brand will be subsumed by its new parent, and Casado and Co. will be employees under VMware (VMW).

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The process moved fairly quickly, and had not been in the works for a very long time, says Ben Horowitz, co-founder of venture firm Andreessen Horowitz, which poured $17.7 million into the startup over three rounds of funding. The deal is expected to close before the end of the year.

The two biggest advantages the tie-up gives Nicira are credibility and scale, says Horowitz. While the company was founded in 2007, the infant — and for now still largely unproven — company only officially unveiled itself this February, so the high price tag may raise eyebrows. Still, Nicira’s upside may be worth the big bet. “Five years from now, this is going to end up looking like a very cheap deal,” said Horowitz, who also sits on Nicira’s board. “They basically bought an option on the future of networking.”

It’s certainly a move that hardware incumbents Cisco (JNPR) and Juniper Networks (JNPR) will have to pay attention to. For VMware, it’s deja-vu, says Stephen Herrod, the company’s chief technologist. “It feels very much like the early days of server virtualization,” says Herrod, who was involved with VMware before its founding at Stanford, before he rejoined in 2001. “We could see the tide coming in.”