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Bell Canada's venture capital affiliate leads new $13.5 million funding round for 'deep packet inspection' gear maker

Ellacoya Finds Deep Packets Up North

Light Reading
News Analysis
Light Reading
7/18/2005
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Broadband traffic management company Ellacoya Networks Inc. knows how to pick its friends. The Merrimack, New Hampshire-based company is on the business end of a $13.5 million round of new funding led by BCE Capital, an affiliate of Bell Canada (NYSE/Toronto: BCE).

“The reason we like those folks,” says Ellacoya CEO Jerry Wesel, “is because of their contacts and their operational experience both on the equipment side and on the service provider side, not to mention the relationship that Bell Canada has with other carriers around the world that we can leverage pretty easily.”

Is the investment a sign that Ellacoya’s deep packet inspection devices are already in, or headed for deployment in, Bell Canada’s networks? (See Bell Canada Reports Q3.)

“Bell Canada is now actively looking at this technology,” says BCE Capital managing director David McCarthy, adding he's unable to provide more detail. “Venture capitalists, unfortunately, get to hear a lot more due diligence [information] than you journalists do,” he explains.

McCarthy says the engineers at Bell Canada had a voice in BCE’s decision to sign the multi-million-dollar check to Ellacoya.

“Of course we always have that dialogue,” McCarthy says. “Of course I can’t tell you exactly what they said, but, as a standard part of our relationship with Bell Canada, we do include them in the process; we solicit their feedback.” Of course.

“We do operate independently of Bell Canada and tend to invest in things that are a little bit out in front of where Bell Canada currently is,” McCarthy says (see Nortel, Bell Canada Research Rural Divide).

If it’s not a slam dunk at Bell Canada, then what exactly is the draw for the VCs? Ellacoya says it’s now “getting traction” with Tier 1 carriers after 6 years of existence (see Ellacoya Lands Korean Deal). The company has already announced wins at Shaw Communications Inc. in Canada and @NetHome in Japan (see Ellacoya Sees Deep Packets at Shaw).

But an in at Bell Canada would do much for the company’s prospects, and perhaps the patience of its investors -- especially Lightspeed Venture Partners, which has stuck it out since 1999 (see New Startup: Ellacoya). (Disclosure: Lightspeed is an investor in Light Reading).

The other three original investors have since gotten out. They are: Bessemer Venture Partners, Centennial Ventures Inc., and Goldman Sachs & Co.

Atlas Venture and Flagship Ventures joined Lightspeed as investors in 2003 (and did a restructuring of the company). (See Is Ellacoya on the Comeback Trail?.) The three did another $7 million round last summer, Wesel says (see Ellacoya Snares $7M).

This latest round of funding, Ellacoya’s fifth, also includes money from new investor Canaan Partners.

Presidio Venture Partners LLC and Sumitomo Corp. have also invested at some point along the way, according to the Ellacoya Website. By Light Reading's calculation, Ellacoya has gone to the well for around $132 million to date.

Wesel and McCarthy are confident that a payday is on the horizon. Wesel says Ellacoya now has several unannounced wins with Tier 1 carriers, and is currently trialing and testing with multiple others. Ellacoya’s 2004 revenues tripled over its 2003 numbers and continue apace for 2005, Wesel says, but declines to give specific numbers. And Ellacoya's product, Wesel points out, now has six years and $100 million of development behind it.

Ellacoya sells a traffic management hardware and software “kit” that broadband providers use to differentiate between various types of packet traffic running over their networks. With that information providers can set up tiers of service or bandwidth usage caps, or reserve bandwidth for applications (like gaming) that require real-time user interactivity.

Ellacoya began by offering a suite of broadband service delivery products, but hit hard times after the boom years and has since focused its products on IP traffic shaping and control (see Ellacoya Cuts Staff -- Again). The company’s portfolio currently includes the e30 switch for large carriers and the smaller 4000 series switch for smaller operators (see Ellacoya Tweaks Service Control).

Wesel says cable companies were the first to adopt Ellacoya’s solution, and they still comprise about two thirds of the company’s 75 customers (see Ellacoya Demos Cable VOIP Stuff). The cable companies, however, will contribute only about half of Ellacoya’s revenues this year.

Ellacoya’s headcount is now “just north of 72,” Wesel says, but that the new investment money will pay for "significant hiring" of engineering and sales and marketing staff.

— Mark Sullivan, Reporter, Light Reading

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