CENX Investors Unveiled

After a prolonged period of secrecy, Ethernet exchange specialist CENX Inc. has revealed the identity of its financial backers, with DCM - Doll Capital Management as the lead investor. The venture capital firm's co-founder, Dixon Doll, is the current CENX chairman.

Doll, a longtime investor in communications and IT startups, tells Light Reading he decided to back CENX in 2009. DCM was a lead investor in CENX's first round, along with Highland Capital Partners , represented by general partner Sean Dalton.

DCM, Highland Capital Partners and a number of smaller investors also participated in CENX's second round. Mesirow Financial Holdings Inc., represented by Tom Galuhn (who is on DCM's board of advisors), is also backing CENX.

Though Doll wouldn't disclose an exact amount, he says DCM usually invests up to $15 million over a series of rounds (usually two, sometimes three) in its portfolio companies, and Doll says CENX falls within that model. He adds that of the current investors, DCM holds the largest stake.

As chairman, Doll has experience backing and helping nurture a communications services exchange startup. DCM was an early investor (in 2003) in Neutral Tandem Inc. (Nasdaq: TNDM), which built a TDM voice exchange business in the U.S. and eventually floated in 2007. It currently has a market capitalization of around $550 million.

He says it was clear as Neutral Tandem was growing that there would one day be a market for an Ethernet services exchange, and he "had the good fortune that Nan [Chen, founder of CENX] came by around two years ago."

Shortly after that, DCM decided to invest in CENX, and about a year ago Doll left the board of Neutral Tandem, which is now one of the companies looking to compete in the Ethernet exchange market in the U.S. and overseas. (See Neutral Tandem Integrates Tinet.)

DCM's initial investment in CENX has been followed by a second tranche. "Series A is where the company is most risky. A sign of a company's progress is that it can raise money in new rounds at higher valuations," and that's what happened with CENX, says Doll.

Doll admits the end game for DCM is to see CENX go public, "but there's no rush. The intention is to get the company to cash flow breakeven in the next 12 to 24 months," says Doll, who believes CENX has the potential to be a "$1 billion company."

Doll knows it's not going to be a straightforward process, though. "There are always issues when you are primarily selling to carriers," as it takes time for them to adopt new ways of doing business, says the DCM man. But he believes the experience gained from growing Neutral Tandem will help a great deal, and is convinced that "the market for what we are doing at CENX is bigger [than in legacy voice interconnect]."

The market is only just getting off the ground, though. "After a period of heavy investment, revenues started to come in during late 2010 [Doll declined to share any numbers], and we expect significant growth in 2011. This will be the year of breakout for live connections for paying operator virtual circuits." (See EENY 2010: COLT Hooks Up to CENX.)

Obviously CENX doesn't have the Ethernet exchange market to itself -- Equinix Inc. (Nasdaq: EQIX) and Telx Group Inc. as well as Neutral Tandem are all vying for Ethernet service provider attention -- though Doll was very cautious in talking about competition. (See Ethernet Exchange Smackdown?)

He notes that CENX faces two types of competitors: others that are offering a similar service; and the direct connect model utilized by many operators (where they strike one-to-one interconnect agreements with each other).

"As the [Ethernet services] world gets bigger, the direct connect possibilities become untenable. We feel the exchange [model] has the value proposition to reduce costs and provide carriers with something new -- to dynamically reconfigure networks across the globe."

He also believes the CENX platform has value beyond the carrier exchange model, and that it could be used by large enterprises to manage their own networks and link to the outside world. "Carriers can be a bit conservative -- enterprises can be a bit more entrepreneurial," he notes.

— Ray Le Maistre, International Managing Editor, Light Reading