Despite patent threats and the CEO's legal history, Goldman Sachs can't resist investing in the content delivery company

July 26, 2006

4 Min Read
Limelight Lands $130M

The broadband delivery platform company Limelight Networks Inc. (Nasdaq: LLNW) Wednesday announced a monster $130 million funding round led by Goldman Sachs & Co. (See Limelight Raises $130M.)

It's a big bet that comes with plenty of risks. Limelight’s core technology is a content delivery platform that caches bandwidth-hungry media like video and gaming in servers at the edge of the network to speed delivery times. With it, it will be making a run at the much higher profile Akamai Technologies Inc. (Nasdaq: AKAM)

Sources familiar with the details say the deal was shopped to many places, including several top-tier VCs. One concern that kept coming up is active patent litigation with Akamai. Another was the CEO's 2001 run-in with the Securities and Exchange Commission (SEC) .

Despite legal challenges, Limelight’s business appears to be doing well, as Internet distribution of all kinds of high-bandwidth media becomes more in demand. The company says it just had its twelfth consecutive profitable quarter, in which it reported more than $14 million in revenues.

Limelight co-founder Michael Gordon says the company intends to use the new funding to add capacity (more servers) to its broadband content delivery platform.

Gordon says Goldman contributed “the majority” of the $130 million but wouldn’t say exactly how much. Our sources say Goldman contributed around $100 million for a 53 percent share of the company and some seats on the board. The Limelight management team and current investors, the source says, will retain a 47 percent share of the company.

Goldman Sachs declined comment.

As for the rest of the $130 million, Gordon says other institutional investors are participating but could not be announced because Limelight is still “dotting its I’s and crossing its T’s” on the funding agreements. He stresses, however, that the round is funded as of July 12 and is now closed.

Sources say other VCs including Accel Partners , Charles River Ventures , Red Point Ventures, and Sequoia Capital considered the deal.

Gordon says the round was oversubscribed, leaving no room for more investors. A Charles River spokeswoman backs up that claim. The others declined comment.

Report: QOS Fees Could Net Billions.)

Akamai filed its patent infringement lawsuit in the District Court of Massachusetts on June 26. The technology under patent was developed at MIT, which licenses it exclusively to Akamai. Akamai, in turn, is responsible for defending the patents when necessary and has done so twice in the past, each time successfully.

Analyst Frank Dzubeck, president of Communications Network Architects, tells Light Reading Akamai is likely to come after Limelight aggressively in the courts. Still, he says, these things often take years to conclude. In fact, even while the court proceedings are playing out, Limelight may be able to expand its technology and customer base significantly, Dzubeck says.

Limelight insists that it has not violated Akamai’s patent. Gordon points out that Akamai did not file a preliminary injunction against Limelight, which could have stopped Limelight from doing business even before a determination had been made on the question of infringement.

In the end a number of outcomes could occur, Dzubeck says. A licensing deal could be reached, or Akamai could even eventually decide to acquire Limelight, In short, the Goldman Sachs team understands the legal threat to Limelight, and still sees favorable odds of making healthy returns on the company.

There's also the matter of Limelight’s CEO Bill Rinehart. Rinehart, while VP of North and Latin American sales at the San Francisco-based email automation company Critical Path Inc. was investigated by the SEC for “fraudulent revenue recognition” practices, according to documents at the SEC Website.

The SEC, according to the document, found that Rinehart and two members of his sales staff had arranged two fictitious $2 million software sales, arranged for the backdating of two other contracts (one for $2.2 million and one for $146,000) and later misled the company’s auditors on the matter. The charges led to Rinehart’s ouster from the company in 2001.

The Northern California district court, at the request of the SEC, levied a fine and barred Rinehart from acting as a director or officer of a publicly traded company. Rinehart later agreed to the bar for a period of five years and also agreed to pay an undisclosed cash penalty.

An industry source says Goldman Sachs asked that Rinehart be removed from the management team at Limelight as a condition of the sale. Again, Limelight’s Gordon neither confirms nor denies this, saying: "Bill Rinehart is still our CEO,” he says. “There may over time be additions or changes to the management team.”

Limelight is headquartered in Tempe, Ariz., and employs 100 people. — Mark Sullivan, Reporter, Light Reading

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