Atrica Attracts $75M

Optical Ethernet startup, Atrica Inc. is set to announce a third round of funding worth $75 million Wednesday, say company officials. This latest round brings the total raised to $117 million (see Atrica Lands $75 Million).

The company far exceeded earlier reports that the third round would close at $30 million (see Atrica Closing in on Third Round).

“I think that was a low number to begin with, but at the same time the external metrics are changing,” says Bill Cadogan, general partner at St. Paul Venture Capital, which led the round. “People have been surprised at the traction other Ethernet companies like Riverstone are getting, and I think that had something to do with the interest in Atrica.”

Indeed, there was significant interest from the venture community in this deal. The buzz generated during the company's search for funding contributed to its selection for Light Reading's Top Ten Private Companies list, where it currently sits in the No. 2 spot.

Cadogan says that the company was offered more than $100 million, but decided to settle on the $75 million. The amount of the round and the fact that more than ten new investors signed on are signs that Atrica could be on to something hot.

St. Paul Venture Capital led the round as a new investor. Other new investors include JK&B Capital, Investor Growth Capital, Saturn Venture Partners (an affiliated fund of Telecom Italia), Gemini Israel Funds LP Ltd., Lehman Brothers, Part’com, Challenge Fund, Young Associates, Triton Ventures, CDIB, and Hotung. Several first- and second-round investors also participated in the round.

According to Cadogan and president/CEO Vivek Ragavan, the terms of the deal were straightforward and very “clean." For example, there are no stages of funding or milestones to meet, and Atrica has access to the entire $75 million immediately, says Ragavan. While neither Ragavan nor Cadogan would talk specifically about the company’s valuation, Cadogan confirmed it was a "down round" from the company's last one, which means the valuation has declined and investor dilution was substantial.

With roughly 175 employees at Atrica, Ragavan says this round will fully fund the company to profitability. He says the company plans to use much of the new funding to beef up its manufacturing and sales force.

Atrica's schtick is doing gigabit Ethernet, while adding protection features to make it carrier class. The company recently demonstrated to Light Reading editors, for example, that it can provide 50 millisecond restoration in an Ethernet network, a feature normally reserved for Sonet networks.

The Ethernet space is already full of players like Ethernet switch vendors Extreme Networks Inc. (Nasdaq: EXTR), Riverstone Networks Inc. (Nasdaq: RSTN), and Foundry Networks Inc. (Nasdaq: FDRY), along with IP routing giant Cisco Systems Inc. (Nasdaq: CSCO). Not to mention, the company also faces competition from startups like resilient packet ring vendor Lantern Communications Inc.

So why are so many venture investors interested in Atrica? Part of the hype is rooted in the strong support the company has gotten from service providers. In its second round of funding, Atrica received money from BellSouth Corp. (NYSE: BLS), Israeli service provider Bezeq, SBC Communications Inc. (NYSE: SBC) (via AurumSBC Ventures), France Telecom SA (via Innovacom), and Telia AB. In the third round, SBC and France Telecom invested again, along with newcomer Telecom Italia.

At least two of these investors have already turned into announced trial customers. In a previous Light Reading article, Ragavan said that France Telecom and Bezeq were beta testing the Atrica products.

“The fact that they have a number of customers as investors is critical,” says Cadogan. “If they are willing to put their own money into the company and work with them instead of sitting back and waiting for them to develop something, it shows another measure of confidence.”

The company will also be adding Cadogan to its board, where he will join Ragavan and Eric Behamou, founder of 3Com Corp. (Nasdaq: COMS). Before his days as a venture capitalist, Cadogan was chairman and CEO of ADC Telecommunications Inc. (Nasdaq: ADCT), where earnings grew from $263 million in revenue in 1990 to approximately $3.2 billion in 2000. Ragavan, who served as CEO of Redback Networks Inc. (Nasdaq: RBAK) after his startup Siara was acquired by Redback in 2000, worked for Cadogan as president of ADC’s residential broadband group.

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