As market jitters continue to rattle the high-tech world, optical startups are beginning to shake.

Consider the case of Capillary Networks Inc. (no Web site now or ever). An early-stage startup planning an optical switching product, Capillary was dismantled by its board on May 25, its assets liquidated or returned.

What gives? Capillary had all the earmarks of future success: a great idea, a high-profile management team, and a rich VC. It even had two offices, one in San Jose for software development, and one in Spokane, Washington, for hardware research--where the founders could hobnob with former colleagues like Bernard Daines at World Wide Packets http://www.worldwidepackets.com.

Capillary's former CEO, Gnanaprakasam Pandian, a veteran of Cisco, declined to comment. And the VC, Pierre R. Lamond of Sequoia Capital http://www.sequoiacap.com--whose success stories include Vitesse Semiconductor and Redback Networks--wasn't taking calls. But a source who requested anonymity said he'd heard the problems were twofold: "They couldn't get ASIC design experts to move to Spokane. Also, they had management trouble."

It's tough to imagine that a move to Washington would be all that daunting to seasoned high-tech engineers. After all, Spokane suits Bernard Daines and other members of the Spokane Inland Northwest Technology Council http://www.spokanehightech.org just fine.

And what management problems could have plagued Capillary? Besides Pandian, who's noted for his laid-back style, the team included: Sundara Ganesh as CTO, who also served time at Bay Networks and Packet Engines; and Amitava Guha, principal engineer, who also held posts at Sun Microsystems, Packet Engines, and Silicon Graphics.

Whatever's behind Capillary's demise, the startup's closing is a chilling reminder that recent market fluctuations have VCs tightening their belts. "When public valuations go down, so do private ones," says a New York investment banker, who requested anonymity. "VCs always respond to the public markets."

And he notes that when a market alternates as quickly from bull to bear as Nasdaq has done recently, investors get cold feet about seeding new startups. In the area of metro optical networking alone, he notes, there have been over thirty funded deals. With only ten or so likely buyers, there just isn't room, he says, for all to achieve a happy exit strategy.

Meanwhile, there's no word about the fate of those Capillary folk who chose to move to Spokane. Maybe they'll join World Wide Packets.

-- by Mary Jander, senior editor, Light Reading http://www.lightreading.com