BBO Files for Bankruptcy Protection

The axe is falling at BBO. Employees will get no severance. Could BBO investor Vinod Khosla be losing his touch?

May 10, 2001

5 Min Read
BBO Files for Bankruptcy Protection

Is Kleiner Perkins Caufield & Byers’s star venture capitalist Vinod Khosla losing his touch for catapulting companies into hot initial public offerings? BroadBand Office Inc., one of Khosla’s top picks, filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in the district of Delaware late yesterday afternoon.

The BLEC (building local exchange carrier) is currently in talks with potential buyers, says Rachelle Chong, general counsel for BBO. “We don’t know what is going to happen at this point,” she says. “There are several buyers we are talking with, and if it comes to fruition the buyer would take the existing BBO customer base.”

One source close to the company speculates that Qwest Communications International Corp. (NYSE: Q) has expressed interest in the company's assets, but Chong would neither confirm nor deny it. Qwest officials also declined to comment on the rumor.

In a letter distributed to employees, company executives said that nearly all of the 435 employees would be laid off effective Friday. Approximately 30 employees will remain for about a month to help maintain services until customers can transfer to a new provider or, if an acquisition ensues, move them over to the buyer, says Chong.

Employees were told they would receive paychecks through this Friday and they would not be getting any severance. “Unfortunately, we regret that due to BBO’s severe financial constraints there will be no severance pay,” reads the letter.

“I’ve seen this happen at smaller mom-and-pop type companies,” says one former BBO employee, who had worked for a large public software company before coming to BBO. “I certainly didn’t expect anything like this, especially from a Vinod Khosla company.

“We believed that the guys at Kleiner would have an ace up their sleeves and that they’d do something to turn the situation around,” he continues. “My wife worked for one of Vinod’s startups before, and she kept telling me that he was not the kind of person that would let the company totally fall apart. It was very surprising to both of us.”

Khosla, who is now on sabbatical from Kleiner Perkins, has cultivated a string of successful startups. Juniper Networks Inc. (Nasdaq: JNPR), Redback Networks Inc. (Nasdaq: RBAK), Qwest, Corvis Corp. (Nasdaq: CORV), CoSine Communications Inc. (Nasdaq: COSN), and ONI Systems Inc. (Nasdaq: ONIS) are just a few of the companies he has helped bring to profitable IPOs. He also helped bring the world Cerent and Siara, companies that were acquired by Cisco Systems Inc. (Nasdaq: CSCO) and Redback back in 1999. And he has had a successful hand in young service provider companies like XO Communications Inc. (Nasdaq: XOXO) (formerly Concentric) and Rhythms Netconnections (Nasdaq: RTHM).

At times he has been referred to as a guru -- a reputation which has placed him at the top of Light Reading’s Movers and Shaker’s list time and again (see Vinod Khosla and The Top Ten Movers and Shakers in Optical Networking). People have laid bets on companies just because his name has been associated with it. But times are different now, and Khosla’s golden touch has been tarnished by a tougher funding environment. BBO isn’t the only one of his startups struggling. Zaffire Inc. has also announced layoffs (see Zaffire Fires 20% of Sales Team), and rumors that the company is in trouble have been circulating for the past few months. Even some of the companies that had successful IPOs are starting to wane. Cosine and Corvis, two of his more recent IPOs, are both trading in the single digits.

BBO was already in trouble late last year when Kleiner Perkins started diverting funding and resources away from it and investing them in a new service provider called Zephion, say former employees (see Kleiner Readies BBO's Rebirth).

“Things started to look bad back in December when they split out Zephion,” says another former employee, who didn't want his name used. “We were missing product deadlines and changing deadlines. Kleiner never really had a handle on what was going on here. We were their Achilles heal.”

While the company's letter to employees blamed the situation on the current market conditions, those who worked there say the problems had more to do with a lack of leadership than anything else. Dan Chu, who co-founded the company when he was still an associate at Kleiner Perkins, has been running the day-to-day activities at BBO as president, while the company looked for a permanent chief executive officer. What’s more, the company was also without a chief financial officer until early this year, when Mike Shanahan was hired. As a result, spending got out of control, says one source, who claims that the company’s debt rang up to nearly $40 million. Chong would not comment on specifics.

“There was no control,” says the employee. “We had people on both coasts duplicating efforts, just burning money. And there was always someone else beating on the door to get paid.”

In March, the financial problems forced the company to lay off 69 employees, mostly out of its Virginia office. Back then company executives said they were just re-organizing (see BBO Says BBye to 69 Employees).

Kevin Compton, a BBO board member and general partner at Kleiner Perkins, says there is still hope. “We are not closing the doors yet,” he says. “We’re fighting for another day here, and at this point we’re not giving up.”

-- Marguerite Reardon, Senior Editor, Light Reading

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