Shlomo and Near Margalit took on the Kleiner Perkins machine to retain control of their company -- and won

October 25, 2000

6 Min Read
Zaffire Keeps It in the Family

Some companies make the transition from startup status to public market smoothly. Consider Sycamore Networks Inc. (Nasdaq: SCMR), Juniper Networks Inc. (Nasdaq: JNPR) -- even the eccentric Corvis Corp. (Nasdaq: CORV). All went through the ritual of VC investment, product announcements, customer wins, and, ultimately, IPO with barely a hiccup.

Then there’s Zaffire Inc. Since beginning its journey to the public market it’s changed its name (from “New Access”), reinvented its product strategy (twice), called in the founder’s dad for a rumble with major investor Kleiner Perkins Caufield & Byers (Dad won), and fired its CEO.

Now, things could be looking up. The recent CEO putsch has freed the company’s founder, Near Margalit, to define Zaffire’s product strategy his way, and he’s aiming at the meat of the metro market with some innovative technology. Yesterday Zaffire announced the all-important “key customer account.” The company has also passed the 200 mark in staff numbers. All are essential steps on the path to an IPO -- an event that Zaffire is believed to be planning for Q1 2001.

It all adds up to a significant turnaround, given Zaffire’s history. Here’s a recap:

As previously reported in Light Reading Zaffire started life as New Access, with the plan of developing low-cost products for the access part of metropolitan area networks. But not for long. In March this year, it switched identities and focused its efforts on developing equipment for core metro nets (see Zaffire: New Name, New Approach). With the name change came a new CEO, Tony Lavia, an ex-Nortel exec brought in at the behest of Kleiner Perkins.

And that’s when things started to get a bit emotional at Zaffire. According to sources close to the company, Margalit and Lavia fell out over the company's product strategy.

“Near Margalit started disagreeing with Tony's choices and got pissed. KP told him that's the way you build a company so deal with it. You're going to be a zillionaire anyway,” says a Light Reading source, speaking anonymously.

Near Margalit reportedly complained to his father, Shlomo Margalit, chairman of the board at MRV Communications Inc. (Nasdaq: MRVC), the lead investor in Zaffire (nee New Access). Together, the Margalit tag-team is said to have taken on Kleiner Perkins and successfully ousted Lavia, allowing Near to take over the CEO slot.

(Margalits elder and younger declined to comment. Light Reading could not locate Lavia. Kleiner Perkins did not return calls. Neither does President Clinton.)

The executive shuffle has apparently improved company spirits.

“The vibe has definitely gotten better,” says one analyst who follows Zaffire. “Tony had a very top-down management style. He was giving a lot of orders and making enemies with the research and development team.”

But the analyst adds that Margalit will probably only be able to take the company so far. “I think they’ll need to find another more seasoned manager before too long.”

In any event, giving Lavia the heave-ho has given Near Margalit what he wanted: the freedom to direct the company's product strategy in the way that he wants.

Margalit is emphasizing its non-DWDM capabilities. In a recent interview with Light reading, Margalit described DWDM (dense wavelength-division multiplexing) as "stage one" of the company's product plan. Stage two will consist of adding Sonet features. Stage three, IP and MPLS (multiprotocol label switching) capabilities.

Margalit claims this "bottom up" approach of building a DWDM platform and then adding Sonet and IP on top of it provides advantages over the "top down" approach taken by players like Cyras Systems Inc. and Redback Networks Inc. (Nasdaq: RBAK), who are essentially building Sonet platforms and then retrofitting them with DWDM.

"If you are designing from the Sonet layer down you will never be able to take advantage of all the capabilities of optical networks," he said. Specifically, he claims, top-down products cannot perform "ring to ring" optical switching without the help of an additional switch.

"That's probably true, but it just seems like apples and oranges to me," says Scott Clavenna, president of PointEast Research and director of research at Light Reading. "Cyras and all those guys are meant to be further out at the edge of the network. They don't support that feature because they don't need to. Zaffire is more of a core product." Repositioning Zaffire away from a straight DWDM play should help its prospects in an IPO, given that the market for pure metro DWDM equipment has turned out to be much smaller than first anticipated (see Report Forecasts Metro Winners, Losers ).

The refocus also helps differentiate Zaffire from ONI Systems Inc. (Nasdaq: ONIS), another metro core player and a stablemate of Zaffire at Kleiner Perkins.

In other news, Zaffire yesterday, Tuesday, announced that BroadBand Office Inc. (BBO), a service provider, has agreed to buy its Z3000 DWDM products for deployment in its metropolitan area network buildout.

Is the BBO contract a big deal? Yes and no. The fact that Zaffire is now shipping products for revenue is significant, given its IPO plans. Customers and revenue are always a bonus when road-show time rolls around.

“It’s important that they actually closed this account,” says Chris Nicoll, vice president at Current Analysis. “BBO is one of the more aggressive BLECs [building local exchange carriers] out there and they need equipment to cut costs and add new services quickly. The fact that they went with [Zaffire] is significant.”

On the other hand, Zaffire is keeping several key details under wraps. For example, the size of the deal, including the time frame for purchasing products, has not been revealed. All the company will say is that it is “significant.”

Further, BBO is an investor in Zaffire and shares the same VC, Kleiner Perkins Caufield & Byers, which means that it has a vested interest (literally) in giving its contract to Zaffire.

Still, some analysts who have been able to get the details of the contract under nondisclosure agreements say it is a big deal, in both senses of the term.

“This is not some five year, $50 million contract announcement, where you have to wonder how much of it will actually translate into revenue” says Nicoll. "I'm confident that this is not just some window dressing announcement."

The BBO contract is Zaffire's second customer win. UTStarcom Inc. (Nasdaq:UTSI), a channel reseller, announced in September that it would buy $15 million worth of metro DWDM products from Zaffire.

-- Stephen Saunders, US editor, and Marguerite Reardon, senior editor, Light Reading,

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