Internet Photonics Earns $10M Credit
In a startup era in which venture capitalists are afraid to lend money to their mothers, it does indeed appear to have come to that. Internet Photonics Inc., a startup focused on optical Ethernet and DWDM transport gear, has quietly scored a $10 million line of credit from Comerica Inc. (NYSE: CMA).
The input is the first financing of any kind the startup's announced since it obtained $31 million last July from a series of venture capital firms, bringing its total funding to $63 million (see Internet Photonics Pipes in $31M).
The deal is clearly a statement that at least one bank thinks Internet Photonics is in the right ballpark with the right goods. It also demonstrates an option that gives qualifying startups a way to avoid the loss of equity and control associated with repeated rounds of venture funding.
Interestingly, Internet Photonics didn't publicize the credit award. Instead, on April 21, it chose to issue a press release to its site only, without alerting anyone.
"We were focused on the major launch of our [product] and first customer," says VP of marketing Gary Southwell. He's referring to the company's announcement late in March that Cablevision Systems Corp. (NYSE: CVC) is among the cable providers adopting the startup's new Gigabit Services Line Access Multiplexer (GSLAM) for video-on-demand services (see Internet Photonics Touts VOD). "In hindsight, maybe we should have made more of it."
Time will tell. What Internet Photonics has signed for is a revolving credit facility, with stringent bank terms, renewable annually. The company will draw money to pay for parts to build its products to meet orders. When customers pay for delivered gear, the credit will be repaid. There are covenants and financial stipulations the company must abide by to keep the facility going.
And of course, like a private citizen's credit line, the bill must be paid. To do that, a company must be sure that cash is coming in. Internet Photonics says it can pay a big loan, thanks to a roster of ten paying customers, including Cablevision and five other "Tier 1" MSOs that can't be named; one large IXC; a trio of telcos; and an international customer. It expects to be cash-flow positive by the end of 2003.
Is it advisable for a startup to use debt to leverage its business? Only in certain cases, says Steven Miller, VP of Comerica's Technology and Life Sciences Division, which proferred the credit to Internet Photonics. "We like to see companies have a strong investor syndicate, proprietary technology... a product in the market and selling... and be selling to a big market," he maintains.
It's a tall order, but Southwell insists it's not unusual for startups to seek credit as a way to extend the life of their funding. Comerica has granted similar deals to other startups in the optical or telecom sector, including $3 million in credit to waveguide amplifier maker Inplane Photonics Inc. (see Inplane Scores $10M More); about $7.5 million in credit to specialty fiber maker Intelcore, now Verillon Inc. (see Verrillon Gets Active in Passives); $4 million to subsystem creator Kodeos Communications Inc. (see Kodeos Gets Kredit); and $1.5 million to Fiberspace Inc. (see Fiberspace Finds Financing), which makes test kit and software for laser manufacture.
Clearly, the size of Internet Photonics' credit facility speaks well of the bank's confidence in the new company. "Actually, qualifying for $10 million revolving credit is a good statement about [Internet Photonicss'] finances in general," writes Scott Clavenna, president of PointEast Research LLC and director of research at Light Reading in an email today.
According to Clavenna, revolving credit may be a better deal for startups that qualify, because it preserves shareholder equity and avoids the "down round" syndrome. "Raising money whenever you need it isn't a great solution," he writes. "It dilutes equity and sharpens distinctions between shareholders with liquidation preferences and those (employees) that live by the whim of the founders and VCs."
Comerica's Miller agrees. While his bank has been fronting credit to startups for over ten years, he thinks it's an option that's likely to catch on more now, as venture capital becomes more selective and companies seek to avoid losing 20 to 30 percent of their equity with each round.
Of course, nothing's guaranteed. Even Miller says that while startups that take on debt typically have solid investor support and at least a year of cash in hand, there are situations where that cash can be eaten up overnight. And the telecom market's a notoriously fickle one, in which carriers make product selections and never act on them.
Still, it's a good 'un for Internet Photonics in a time when funding of any kind is tough to get. "Yes, these days bank credit facilities for startups are few and far between," writes Greg Blonder, general partner at Morgenthaler in an email. "It generally signals the company has sufficient cash and assets during the loan period to meet the bank's risk profile -- in other words, the ship is in no danger of sinking before it reaches the other shore."
— Mary Jander, Senior Editor, Light Reading