Telecom Woes Prompt More Layoffs

A new wave of layoffs sweeps through as startups like Ellacoya, Tenor and CoSine seek to conserve cash.

May 17, 2001

4 Min Read
Telecom Woes Prompt More Layoffs

A round of brutal layoffs swept through two Boston area startups this week. Ellacoya Networks Inc. laid off about 20 percent of its employees, and Tenor Networks Inc. laid off roughly 10 percent.

“In general, the first half of the year has been a shock,” says Ron Sege, CEO of Ellacoya. “We went from a go-go-go! environment to a stop-stop-stop! one. Everyone from carriers to CEOs to employees to even John Chambers of Cisco have had to react to it.”

What a difference a year can make. The summer of 2000 was one of the most profitable IPO seasons ever. One of Ellacoya’s competitors, CoSine Communications Inc. (Nasdaq: COSN), had a hugely successful IPO back in September (see CoSine Soars On Debut). Last month CoSine announced that it had laid off about 10 percent of its employees in an effort to re-organize.

Last year, many startups like CoSine and Ellacoya looked toward emerging competitive local exchange carriers (CLECs), with their quick sales cycles, for fast revenue injection. Now, as many of these CLECs have gone out of business or are struggling to keep afloat, equipment companies must target incumbent carriers (ILECs), which often have much longer sales cycles that require more sales support and testing (see BBO Files for Bankruptcy Protection).

“Every single one of these companies wanted to go after the CLECs,” says Alex Henderson, an analyst with Salomon Smith Barney. “ILECs take so long to make decisions, who could wait? But now they’re all shifting their plan, and it’s a more complex and expensive process to sell to bigger incumbents.”

But even startups like Tenor, which offer a product targetted at core applications have had to adjust their business plans. "We have to take into consideration that sales cycles are longer," says Susan Ursch, the company's director of public relations. "Carriers are cutting back and they are taking longer to decide on products."

Ellacoya’s employees were informed about the cutbacks this morning around 11:00 AM, East-coast time. CEO Ron Sege called a company-wide meeting, where he announced to nearly all of the company’s 250 employees that Ellacoya would be letting go about 20 percent of its staff.

Sheets of paper were passed around the room, and those 50 employees who were part of the layoff were asked to leave the room and report to designated areas where human resource personnel were waiting to advise them on their severance packages and accelerated vesting on their options. The experience left a bitter taste in the mouths of some, though Sege notes there is never a good way to do this.

“I felt like I was being cut from the varsity basketball team,” says one former employee, who didn’t want his named used. “I was really very disappointed in the way they handled it.”

Tenor broke the news to the unlucky tenth of its 166 employees on Tuesday. Ursch would not share specifics about how employees heard the news, but she did say she was very “proud of the way Tenor handled itself."

Both Ellacoya and Tenor are well-funded startups. Ellacoya just raised a $52 million round back in December, bringing its total funding to $86 million (see Ellacoya Gets a Blue-Chip Backer). And Tenor has raised some $120 million in its three rounds of funding. While both companies claim to have plenty of cash left, they say they are just preparing for the worst. Officials from neither startup would disclose burn-rate information.

“It’s a reality of business in this climate,” Ursch says. “And it had to be done. We’re well financed, and we’ll ride out the storm.”

Neither Tenor nor Ellacoya has shipped its flagship product for revenue. Ellacoya's Sege says the company started beta testing its carrier-class service-aware switch two weeks ago and will begin commercial shipments later this year. Ursch says Tenor has completed beta testing of its core switch and is awaiting approval to announce its first customer.

Salomon's Henderson says both companies have interesting products, but he contends that being able to ship product for revenue is key and he acknowledges that staffing cutbacks could be helpful.

“It’s a different story if you have orders and are shipping product,” he says. “Everyone right now is trying to weather this storm, and it’s prudent for anyone to keep the burn rate low.”

- Marguerite Reardon, Senior Editor, Light Reading

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