VC to Startups: Pare Down, Team Up

ORLANDO, Fla. -- NFOEC 2003 -- Former Cisco executive and InterWest Partners venture capitalist John Adler told the audience here that the new model for startups is to develop incremental improvements to a carrier's network – not a product that changes the way they do things.

"Disruptive equals death," said Adler in his keynote address at the 2003 National Fiber Optic Engineers Conference Tuesday.

Ironically, Adler was once was the senior director of marketing at Monterey Networks, which made a wavelength router so disruptive it was bought by Cisco Systems Inc. (Nasdaq: CSCO). Cisco reveled in Monterey's disruptiveness – until it realized how expensive it can be to try to sell a disruptive idea to conservative carriers, whereupon it discontinued the product (see Cisco Kills Monterey Router).

Adler said innovative technology can still make its way from startups to carriers, given the sour economy. "What has changed is how innovation is moving in the value chain," he announced. "But the fundamentals haven't changed."

Translation: The stuff of good startups is more or less the same. They need strong management. They need really slick technology. They need enough cash to get from PowerPoint slides to profitability.

But nowadays, a startup needs a carrier customer or a larger incumbent vendor to vouch for its technology early in its development. Said Adler: "Early proof of concept is essential now. You can't spend $30 million in 30 months looking for a customer."

Nevertheless, Adler remains optimistic that there are ways for telecom startups to make profits while still creating the customary 1,000 percent return for their investors. Naturally, this requires the startup to be a lean operation.

It also helps if the startup begins its life by providing products that are "modular upgrades" to elements of the carrier network – stuff that the giant incumbent vendors can't or won't develop because the revenue opportunity is too low. Such technology – bit it equipment blades and network software – can make it easier for the startup to find business partners and get acceptance into the carrier network, Adler said.

From there, it's up to the startup to carefully manage how it owns the customer relationship. After the carrier has bought into the incremental stuff, then the startup will stand a better chance of selling something that's a little more advanced and a little more aggressive.

Another approach Adler suggested is for startups to first sell to enterprises, and then move into the carrier world. Cisco wrote the book on that approach, he added, as did Newbridge Networks. And try targeting the access network, too: "Networking is all about moving bottlenecks around, and the access network is where the bottlenecks are now."

Adler's most recent bet as a VC is on Covaro Networks Inc., a company devising a way to extend Ethernet into the enterprise while making it more manageable as a service (see Covaro 'Jacks' Ethernet). It's hard to say if Covaro follows all the rules for successful startups that he discussed yesterday. It is safe to say one thing, though: It ain't no Monterey Networks.

— Phil Harvey, Senior Editor, Light Reading

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Honda_Elise 12/4/2012 | 11:27:05 PM
re: VC to Startups: Pare Down, Team Up
Based on John's comments, he would be perfect for
CA governor. He's already shown himself to be
a good politician, talking out of both sides of
his mouth.

He was able to sell Monterey Networks to Cisco
and walk away with a bunch of money. Now he
tells startups that they shouldn't do what he
did, making innovative products.

I think what he really means is:

1. Be careful with our VC money or we may pull
the plug on you if you attempt something

2. Build products that the big network product
companies like so that they can aquire you in
2-3 years and the VCs can get their payoff.
dljvjbsl 12/4/2012 | 11:27:05 PM
re: VC to Startups: Pare Down, Team Up
If the advice is now to add incremental value to a carrier's network, the next question should be where? Where can a start up add incremental value that could not be done better by the vendors who actually have equipment running in the network. How can a start up add ncremental value to a Nortel or Cisoc box? It will have to be an external box that does not intract though teh control lane with the existing boxes or something that can replace pin for pin an existing cariers box. THis would be something like AMD to Intel or Apple to Micorosft. Either way this is a very difficult task that does not portend any great access to profits.

I ahve seen this startegy in action at some companies. Teh customers after tifling their yawns walk away without buying. There is simply no reason to. They get adequate performance from their existing suppliers equipment without the risk of incompatibilities.
ThouShaltNotJudge 12/4/2012 | 11:27:04 PM
re: VC to Startups: Pare Down, Team Up IMHO, the VC's ought focus their attention on start-ups with innovative ideas for high margin content delivery. This, in turn, will revitalize the need/demand for disruptive equipment technology.
corvisalum 12/4/2012 | 11:27:02 PM
re: VC to Startups: Pare Down, Team Up /start rant

Adler comes across as an "expert" providing insights and guidance.

Excuse me? What has he done in his lifetime that he feels he can provide words of wisdom? Monterey was a bust (the product never made any sense, was too expensive and, anyway, what did Adler do there?) and his investments don't seem to have a shot in hell of succeeding. And he wants to tell me what kind of a product I should build ? Puh-leeze - it looks like nobody else wants to talk at this sparsely attended conference and only addled-brained Adler and lousy-Lanzq (again, what has he done in life that he is an expert?) are eager-beavers claiming expert-status.

I would much rather listen to the Doug Greens of the world who have successfully been part of multiple startup sales, truly understand the market and progonisticate on specifics (like ROADMs are in) rather than spew platitudes (like 10 reasons to be optimistic or "disruption is death").

/end rant

I feel much better now.

optical_ranger 12/4/2012 | 11:26:59 PM
re: VC to Startups: Pare Down, Team Up Corvisalum,

Dude! You are extremely bitter....But let's get the facts straight here.....

1) Monterey was not the only one pitching wavelength granularity....There was LU, NT, Tellium, Alcatel and other start ups....What happened here was a market collapse (starting with the core)

2) I guess YOU are not familiar with John's background which is totally optical and includes numerous profitable products

3) Have YOU tried to market/sale to service providers lately? For them its CYA time so non-incumbent suppliers need to find creative ways to get them to eventually buy

4) Regardless of John's background, he has the purse strings so to speak...So, I guess YOU are not looking at VC funding

Given the level of your bitterness, why don't you do us all a favor and put your head back up your....

Optical Ranger
RouterOttawa 12/4/2012 | 11:26:58 PM
re: VC to Startups: Pare Down, Team Up Adler's most recent bet as a VC is on Covaro Networks Inc., a company devising a way to extend Ethernet into the enterprise while making it more manageable as a service (see Covaro 'Jacks' Ethernet ).

I guess this shouldn't be any great surprise. Covaro is rising up from the ashes of the Iris group which was the follow up to.....

Monteray networks.
optical_ranger 12/4/2012 | 11:26:57 PM
re: VC to Startups: Pare Down, Team Up You are not quite right here.....You have a couple of Monterey folks who had NOTHING to do with the Iris group and vice versa. What you do have are a group of people with transport experience (Fuji and Alcatel)...With their focus on ethernet over whatever (not just fiber), they should have a shot at success

opticalweenie 12/4/2012 | 11:26:55 PM
re: VC to Startups: Pare Down, Team Up My bet is that optical ranger is Adler.

simontemplar 12/4/2012 | 11:26:52 PM
re: VC to Startups: Pare Down, Team Up Adler worked at Alcatel with Bass, Ellefson.

Adler worked at Monterey with Bass.

Now Adler is investing is Covaro.

Old Boys club?
wass 12/4/2012 | 11:26:52 PM
re: VC to Startups: Pare Down, Team Up Actually, the majority of the technical team came from Metera. It will be interesting to see how a a team that is primarily transport oriented does with Ethernet.
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