Optovation, an Ottawa-based startup developing an optical performance monitor and wavelength converter, closed a $20 million second round of funding today (see Optovation Raises $20M).

The $20 million, though not a massive amount, is notable in this current market. It also keeps alive pieces of the startup formerly known as Roshnee, which were used to build Optovation. Former Roshnee founder and Chairman Raj Singh is the chairman of Optovation.

Roshnee, which focused on building an all-optical switch for the metro market, was split into two companies back in September 2000: Optovation and Inara Networks (see Roshnee to Split in Two). Back before the breakup, Roshnee had two facilities, a team in Ottawa developing optical components and a team in San Jose, Calif., working on system-level design. The team in Ottawa became Optovation, and the team in San Jose became Inara, which has since folded.

According to Rob Coneybeer, partner at New Enterprise Associates (NEA), who sat on Roshnee’s board and now sits on Optovation’s, Optovation received all the intellectual property and funding that Roshnee had raised up until September 2000. This included the remaining cash from the $11 million equity round raised in the previous spring (see Roshnee Raises $11 Million in Financing and Assembles Team).

When word first leaked out that Roshnee was breaking up, many in the industry likened the situation to the split of another startup, Fiberlane. That startup spawned two other startups, Cerent and Siarra, which were sold to Cisco Systems Inc. (Nasdaq: CSCO) and Redback Networks Inc. (Nasdaq: RBAK), respectively, for a total of about $11.3 billion.

In the end, the breakup of Roshnee was no Fiberlane. Inara, which recruited former Cyras CEO, Steve Pearse, as its chairman, was actually shut down last month (see Ex-Cyras CEO Joins Roshnee Spinoff). The company had been developing a core optical switch and had raised $10 million. Singh, who had invested in Inara, said in an email that the company was unable to find additional funding and so was forced to close its doors for good.

Meanwhile, Optovation has made progress. The company’s roadmap calls for two products, an optical performance monitor and an all-optical wavelength converter. The optical performance monitor is already generating a small amount of revenue, as samples ship to six customers, with orders from another six in the pipeline, says Kevin Forbes, the company’s CFO.

Although he wouldn’t specify the names of any of these customers, it is likely that Nortel Networks Corp. (NYSE/Toronto: NT) is among the first six. This wouldn't be entirely surprising, given that Ottawa is home to both Optovation and Nortel’s optical division. What’s more, several members of Optovation’s management team are ex-Nortel employees, including CEO Larry Tarof; vice president of business development Wade Daley; vice president of manufacturing Ed Cremer; and director of product line management Bob Dittburner.

"It would probably be safe to guess that all of the major DWDM transport companies are interested,” says Forbes. “And it would be a good guess that the bigger players are likely our customers.”

Optovation claims that its performance-monitoring component measures the actual transmission of the optical signal and determines whether bits have been lost in an optical transmission, without converting the optical signal into an electical one. The product is unique in that current monitoring systems for DWDM systems only measure power and signal strength. Having this type of performance monitoring is important, because it provides DWDM designers with the same level of redundancy found in Sonet equipment.

"From an investment perspective, this company has a real product and real revenues," says Coneybeer. "It’s a meat-and-potatoes kind of technology. It isn’t the sexiest thing out there, but every company building a next-generation transport platform needs it.”

Forbes says that for 2002 the company plans to generate most if not all of its revenue from the performance-monitoring components. But its roadmap also calls for the development of an optical wavelength converter. This product is currently under development and uses a chipset licensed from Alcatel SA (NYSE: ALA; Paris: CGEP:PA).

"If all optical networking really takes off, this will be a booming business for us in the future," says CEO Tarof.

The lead investors in this round were Altamira and Newbury Ventures. Other contributors included New Enterprise Associates (NEA), Redwood Venture Partners LLC, Desjardins Venture Capital Group, the Ottawa office of Investissement Desjardins Inc., andBMO Nesbitt Burns Equity Partners.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com