CEO Bloodbath Points to Pressure

When startup CEOs start resigning, red flags dart up in the investor community faster than you can say "sell." In the past few weeks, Cyras Systems Inc., Sorrento Networks Inc., Zaffire Inc., and Nanovation Technologies Inc. have all seen their CEOs to the door.

What makes these situations interesting is that the CEOs leaving these companies are not the founding CEOs, who are typically more technically focused and often replaced by more business-savvy types. In fact, all of the CEOs in these situations have been the experienced big guns with corporate resumes, hired by the venture capitalists to firm up confidence on Wall Street to support a potential IPO.

“When a CEO resigns who has a big company background, it suggests trouble either with the product or with the market definition," says Fred Wang, general partner at Trinity Ventures. In the case of Nanovation, which makes optical chip sets, the problem could be with the product. “The company started out with some pretty strong, interesting technology,” says Wang, who has followed the company closely. "But I suspect that they may have some technology development issues."

The company has recently shifted its technology focus from indium phosphide to silica-on-silicon. While the silicon technology, may not result in the same type of performance, the company says that it is sufficient for current market needs and is easier to produce (see Nanovation Comes Down to Earth).

What worries analysts and investors most about Sorrento is its lack of focus on a clear strategy. The startup was spun out of Osicom Technologies Inc. (Nasdaq: FIBR) and was supposed to go public. But earlier this week plans changed completely. Sorrento will now be rolled back into Osicom and the entire company will be renamed Sorrento (see Osicom Investors Rebel). As a result, Sorrento’s president and COO, Oren G. Shaffer, relinquished his management positions, while CEO Xin Cheng will now sit on the board of directors.

"The flip-flopping of strategy concerns us," says Chris Nicoll, a VP at Current Analysis. "If they thought through the first move and then quickly reverse plans, what is going on at the company to make things change so quickly? The products in this space are all very similar in functionality. The stability of the company and effectiveness of the sales and support teams will be what makes a difference."

The departure of the Cyras and Zaffire CEOs seem to be the most surprising events to analysts. Cyras, which has been touted as a hot prospect over the last several months, has already been drumming up a lot of interest for its upcoming IPO. Steve Pearse, the departed CEO, cited his commute from Boston to Silicon Valley as his reason for leaving (see Cyras: Crisis? What Crisis? ). But some analysts remain skeptical.

“The commute didn’t seem to bother him that much for the last 13 months,” commented one analyst who didn’t want to be named.

Indeed it seems strange, with the industry so enthusiastic about the company, that he would leave so close to filing for an IPO. “You have to remember that these are savvy guys,” says Wang. “If he happened to think there was some sort of problem with the product, he might want to get out before his reputation is damaged.”

Still, others say that if his departure was truly only based on personal reasons, it is better he get out sooner rather than later. "After the company has gone public, you’re sort of stuck there for a while," says another anonymous analyst.

Tony Lavia, who left Zaffire in August, was also a surprise because the company has both strong financial backers, like Kleiner Perkins Caufield & Byers, and a solid team of technologists (see Zaffire’s CEO Stands Down). Zaffire and Cyras deny any internal strife and stick by their stories that the CEOs have left for “personal reasons”.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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