VentureBeat

Mobile software outsourcing company Aricent has raised a new $60 million round of funding from New York private equity firm Kohlberg Kravis Roberts and The Family Office, an investor in Bahrain. It’s also becoming one of the biggest private tech companies in Silicon Valley that nobody knows about.

Aricent was created a couple of years ago as a spin-off from contract manufacturer Flextronics, in a funding led by KKR and Sequoia Capital. The round is an up round, according to the company, meaning the valuation after the close is higher than it was before.

I have to believe that this company is one of the few in the valley that could be headed toward an initial public offering. Having said that, the environment for IPOs is still horrible and the company isn’t shedding any light on its profitability right now.

Palo Alto, Calif.,-based Aricent has 8,000 employees, including 6,500 developers in India. It’s hard to fathom the company has so many people working on mobile software. (Among other things, they helped put together the cell phone screen at left). But Aricent is essentially the hired gun of mobile technology. It is the reason that smaller cell phone companies such as Alltel can launch a new phone against bigger competitors.

Keith Higgins, vice president of marketing, said that the company has more than 550 customers. It works jointly with Frog Design, the industrial design firm owned by Flextronics, to design software for mobile phones, telecom infrastructure companies, and cell phone service providers. It does everything from testing user interface prototypes on phone users to the billing operations for cell phone services. It has a product portfolio of more than 125 products which it licenses to customers.

The pressure on carriers and others in the cell phone ecosystem has been growing, leading to more outsourcing. The company’s revenues have grown from $238 million in its 2006 fiscal year to $382 million in its 2008 fiscal year. Based on its first quarter’s results, the company is on a run rate to hit $470 million in its current 2009 fiscal year, making it one of the biggest private tech companies in Silicon Valley. More than 400 million handsets have shipped with Aricent’s software.

The company competes with other big companies that offload core services in the $100 billion telecom software and services market. The list of rivals includes Accenture, Infosys, IBM, Sasken, Tech Mahindra and Wipro.

But Higgins says no one else has Aricent’s breadth of product offerings and experience with communications companies. For instance, Higgins said that besides working closely with Alltel to get new phones to market, it has also worked with Sprint since 2003 in a variety of strategic engagements. It has partnered with Aircell in deploying the first in-flight wireless broadband system and created market-leading DSL (digital subscriber line) equipment with Alcatel-Lucent. Nokia, which you would figure is big enough to fund its own internal development, is a customer of Aricent.

As new platforms such as Android and WiMax arrive and make mobile phone software more challenging, Aricent expects its business to grow. The Bahrain investor is participating in part because Aricent will expand its operations in the Middle East. Higgins said the latest funding is not an alternative to an initial public offering and he noted, “It’s not such a bad thing to be private these days.”

The new round consists of two parts: a $35 million tranche and a $25 million tranche, for a total of $60 million. Previous investors Flextronics and Sequoia did not participate. The company says it will use the money to increase its engagements with more customers.

VentureBeat talked last night with Roger McNamee (pictured left), asking him why his firm, Elevation Partners, would want to buy into Palm, a company that many people see having a tough time ahead, given intense competition.

Some doubt its chances of survival as a standalone company.

[See our initial coverage of Elevation's $325 million in investment into Palm. Also see the Mercury News coverage. The Elevation-Palm deal comes amid a wave of M&A activity -- see coverage here of Flextronics' acquisition of Solectron yesterday. Finally, the acquisition of Avaya, a computer networking company, for $8 billion by Silver Lake Partners and TPG, announced yesterday, is the latest in a trend of massive private equity buyouts.]

Here’s how McNamee explains the Palm deal. His starting thesis is that mobile is big and getting bigger — that technology is increasingly allowing people to take and get content wherever they want. Only about seven percent of cellphones are smart-phones today. Within some time frame, say ten years, all devices will be smart-phones, he said. And with only a few players with the know-how to offer a full platform — he counts three, Apple, RIM and Palm — this bet makes a lot of sense, he said.

Here’s more on why: A significant cycle of hardware innovation over the past year has made mobile devices smaller, but those devices are imperfect, he said. Each of them — the Q, the BlackJack, the Pearl and the Palm Treo — have had their own limitations. “It’s really hard to do more than one thing really well,” McNamee notes.

Because hardware has made so many advances, the accompanying software makes a significant difference. Apple succeeded with the iPod not merely because it gives you a hard drive to carry tunes around with you, but also because of its surrounding architecture, including The iTunes store and supporting software. People won’t buy music from a platform that doesn’t have all these parts, he said. The same success has been seen by the video-console players, where McNamee has looked closely: One vendor takes charge of the key components and makes them all work together.

So what are the characteristics of the players most likely to succeed in the smart-phone industry? McNamee lists them: They’ve got to be innovative, have software, have good systems engineers and be ready to take risks.

Who fits the bill? “At a minimum, RIM, Palm, and in three weeks, Apple,” says McNamee, “But not everyone.” Many software makers failed at making the transition to graphical mode interfaces on the PC; similarly, many phone companies won’t transition either, he said.

Because all phone will one day be smart-phones, “this is not a winner-takes-all situation,” he said. He believes Apple’s iPhone will be successful. Its base of some 100 million iPod users, mostly satisfied customers, gives Apple a huge start. RIM also continues to do well. And Palm, too, has got what it takes. Having recruited Jon Rubinstein, and benefiting from idea guy Jeff Hawkins, the company has a team of innovators that is difficult to replicate.

And thus begins the slow, steady grind by Palm to reassert itself.