Light Reading

Tachion Trolls for Cash

Light Reading
News Analysis
Light Reading

Tachion Networks is trying to give its pallbearers the slip.

Since it fired most of its employees last week, the company is trying to morph itself into a smaller company with less lofty product plans than it had last year (see Crunch Time at Tachion). Its CEO, Jeff Matros, told a New Jersey newspaper over the weekend that if it doesn't raise $20 million in new funding by July 6, the company will shut down.

This dash for cash marks the second major restart for Tachion. The first happened during fall 2000 when the company realized its product launch was delayed and an initial public offering was much farther away than it had hoped.

This time, though, Tachion isn’t just resetting its goals. Instead, sources say, Tachion is recapitalizing itself -- changing its capital structure to give some of its early investors an alternative exit strategy. It is also mulling a name change for the recapitalized firm.

To pull this off, Tachion appears to be raising what's known in venture capital circles as a “washout” financing round, also called a “pay-to-play" round. A washout round is a financing round done at a lower valuation that is designed to separate those investors that don’t want to support the firm any longer from those that do.

If Tachion completes a washout round, each investor's ownership in the company will be significantly diluted, unless they decide to chip in for the $20 million round. The company’s management structure would probably stay the same, though it may lose any board members tied to investors that decide to bow out.

Whatever its investors decide, Tachion has already picked a name for its reemergence. According to sources, the company wants to call itself Phoenix Network Systems Inc. (Rising from the ashes, get it?) On June 18, Tachion registered the domain name, according to data from Network Solutions. The Tachion employee who registered the name, Steven Ferrino, tells Light Reading he didn't know what Phoenix Network Systems' relationship would be to Tachion. "I was just following orders," he says.

Now that it's somewhat clear how Tachion is trying to press on, last week's actions make more sense. At that time, Tachion told its fired employees that it was shutting down operations, but then reversed that stance when approached by Light Reading. It's possible, of course, that Tachion might shut down. But its also likely the firm could continue after it makes some significant cosmetic changes.

This leaves one big question: Are investors willing to keep Tachion alive, given the fact that it has raised $85 million in funding since 1996 and has never shipped a commercial product?

Among those pondering that question are Lehman Brothers Venture Capital Group, Goldman Sachs & Co., LightYear Communications, J.P. Morgan & Co., Morgenthaler Ventures, Walden International Investment Group, WaldenVC, Singapore's EDB Investments, and Clark McLeod, Chairman of McLeodUSA (Nasdaq: MCLD).

Tachion’s board members include its CEO Jeff Matros, McLeodUSA director Roy A. Wilkens, and Mike Odrich, Managing Director and Head of Lehman Brothers' Private Equity Division.

Tachion did not return calls. Nor did Wilkens, Odrich, or representatives from Walden International.

- Phil Harvey, Senior Editor, Light Reading

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3/7/2014 | 12:52:49 PM
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