Startup hitches a ride with Google

NEW YORK (Fortune) -- The best companies know they can't do it all themselves, so they encourage an ecosystem to grow up around them. Think of Wal-Mart's "Vendorville" in Bentonville, Ark., or the hand-picked produce suppliers to McDonald's, or the way Japanese steel companies follow Toyota around the world.

Google (Charts) thinks that way too, and a primary example is a tiny startup in Mountain View, Calif., called Meraki that already is swimming in Google's wake. Google has gotten a lot of attention for its support of various free high-speed wireless access schemes, including a project in Mountain View, where it also is headquartered, and a proposed counterpart in San Francisco.

For a while it was assumed that Google wanted to operate a vast wireless network itself as part of its global-domination plan. Looking at Meraki, it's clear that so long as Google can help spread free Internet access - and get its lucrative search box in front of grateful users - it's not so particular about who provides the service.

Meraki is a small but interesting vessel for Google's ambitions. Founded a year ago, the company grew out of research into so-called wireless mesh technology at MIT by its three founders, led by Sanjit Biswas, Meraki's 25-year-old president and CEO. Wireless mesh allows cheap routers, or repeaters, to form a network by connecting themselves to a high-speed Internet source like a cable modem or DSL line. Meraki sells a $50 router about the size of a bar of soap that allows its user to sponge off nearby connections.

The concept isn't new. Already, companies deploy expensive gear from the likes of Cisco (Charts), Nortel (Charts), Motorola (Charts) and a well funded startup called Tropos to create wireless networks inside their offices. Municipalities also are spending big bucks to develop wide-area networks. Individuals buy equipment from Netgear (Charts) and Cisco's Linksys division to turn their own DSL and cable connections into wireless hot spots for their homes.

Meraki's plan, a play on the same technology, is to enable small towns, property managers or neighborhoods to set up their own networks. "Our goal is to provide something consumers can deploy themselves," says Biswas.

Helped along by Google, Meraki already is off and running. Biswas says about 5,000 of the company's Meraki Mini devices are deployed in 30 countries, serving about 20,000 users. Google, along with several of its former employees and current advisors, provided the company with its initial investment of less than $1 million. More importantly, Google gave Meraki its first order. Google distributed the devices to businesses and apartment complexes in Mountain View that were having trouble connecting to the city's free wireless system.

Meraki then fed further on the Google ecosystem to raise venture capital in December: Google investor Sequoia Capital alone invested $5 million to help Meraki commercialize its product.

The Meraki system is deceptively simple. A user plugs in the device to an electric outlet - it uses about as much power as a nightlight - and a hotspot is created. (The company plans to release a solar-powered device later in the year that can be deployed outdoors.)

A network operator can make money on Meraki in one of two ways. It could build out a network and offer free service supported by advertising. (Cue the Google theme song.) Meraki is spending about $60,000 to experiment with such a system in a trendy neighborhood of San Francisco. Or the operator could charge for connections at a fraction of the cost of existing Internet service providers.

The secret sauce, according to Biswas, is the configuration software inside the device that helps it find other devices in the network and allows the network operator to bill customers on Meraki's central network. In either case, advertising is a tantalizing opportunity: Because the network is so localized, the opportunity for advertiser targeting is rich. A local merchant knows every viewer of a daily sponsored message, for example, lives in her neighborhood.

Meraki's quick development shows how relatively easy it is to start a company in the age of globalization. It uses the same Taiwanese manufacturer, Delta Networks, that Linksys and Netgear use. Biswas says the company has "tens of thousands" of additional devices on order. While it is spending its own money to jumpstart development in San Francisco, it recently opened a Web store so entrepreneurs around the world can order devices to start their own networks. An order recently came through from Slovakia, he says.

Meraki has just 15 employees today, and nearly every one had an offer to work at Google at some point. "We enjoy the flexibility and freedom of running our own show," says Biswas, who studied computer science at Stanford before attending graduate school at MIT, from which he is currently on leave. "We wanted to be our own bosses."

If the Meraki founders are successful they'll essentially have their cake and eat it too: A profitable connection with Google with the independence of running a startup. An ecosystem, after all, needs to work for the guppies as well as the whales.

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