Yafo Scores $22 Million

Is this a sign of a spring thaw in the 40-Gbit/s winter? We'll learn more next week at OFC

March 14, 2002

3 Min Read
Yafo Scores $22 Million

Yafo Networks, which is developing a solution to handle polarization mode dispersion (PMD) on ultra-high-speed networks, announced today that it has raised $22 million in a third round of funding (see Yafo Raises $22M).

In addition to keeping the company moving forward, the funding may also signify renewed interest in 40-Gbit/s technology -- which has been all but forgotten in the current telecommunications environment. Signs point to Yafo buckling down and raising more cash for what may be a long development cycle.

The company, which was formed in 1999, has not had a funding round since March 2000 (see Can Yafo Lift Speed Limits?). Last November, it cut its 100-person staff in half to conserve cash (see No Go for Yafo? ). Paul Finke, Yafo's president and CEO, says the company began looking for money in the summer of 2001, and he expects this new cash to last through 2003.

So far, only previous investors have contributed to this round, but the round is still technically open for outside investors, says Finke. U.S. Venture Partners led the round, while Boulder Ventures, Mellon Ventures, New Enterprise Associates (NEA), Wheatley Partners, and WorldCom Venture Fund also coughed up some change. In total, the company has raised $61 million to date.

Polarization mode dispersion, a type of degradation of the optical signal, is the problem Yafo is solving (see Chromatic Dispersion and Polarization Mode Dispersion (PMD)). It is a major issue at transmission speeds of 40 Gbit/s and can be a problem at 10 Gbit/s on certain types of fiber and in certain networks. While Yafo has also developed a solution for 10 Gbit/s, the company feels the sweet spot of the market is at 40 Gbit/s.

Yafo’s success is contingent on carriers upgrading their networks soon to 40 Gbit/s. Since the carrier bubble burst last spring, 40 Gbit/s has fallen dramatically out of fashion. As early as last summer, experts, including Yafo’s own founder and CTO, Henry Yaffe, conceded that the market would not develop as quickly as they had anticipated (see 40 Gbit/s Takes the Slow Lane).

Speculation over when the market will actually take off continues into 2002. Some experts, like Stephen Montgomery, president of ElectroniCast Corp., believe that carriers will begin deploying 40 Gbit/s this year. Others say it will be more like late 2003 into 2004, with a substantial market not shaping up until 2005 or 2006.

Many of the typical early technology adopters are in deep financial trouble and unlikely to spend much on transport this year. Qwest Communications International Inc. (NYSE: Q), Williams Communications Group (NYSE: WCG), WorldCom Inc. (Nasdaq: WCOM), and Sprint Corp. (NYSE: FON) are all saddled with tremendous debt. Williams is on the verge of bankruptcy.

Other companies developing PMD compensators include Phaethon Communications, General Photonics Corp., Corning Inc. (NYSE: GLW),and JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU).

Finke says Yafo only needs a couple of customers to get started. “Look at Ciena,” he says. “Sprint basically made them.”

A good point, but today even Ciena Corp. (Nasdaq: CIEN) is struggling to meet its revenue estimates each quarter as it deals with its customers' continued capital budget cuts.

PMD compensation is expected to be a hot topic at the Optical Fiber Communication Conference and Exhibit (OFC) in Anaheim next week, as new startups developing PMD compensators are expected to emerge. Larger companies like Alcatel SA (NYSE: ALA; Paris: CGEP:PA) are also expected to be discussing their plans for handling PMD at OFC.

— Marguerite Reardon, Senior Editor, Light Reading

For more information on OFC 2002, please visit: www.nottheofc.com

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