2003 Top Ten: Startup Flameouts

In 2003, everything old was new again, and new things had become old. This wasn't good for startups, especially flashy, pie-in-the-sky startups promising "revolutionary" products.

Elaborate new technologies that required ripping out and replacing old equipment were rejected outright. Carriers' interest was limited to anything that would enable them to sweat the old network for another 12 months.

As if that weren't bad enough, venture capitalists continued to hide in caves, so even those startups that had promising developments had trouble finding the cash to continue.

Combine hesitant operators with coy VCs, and you get a miserable environment for startups. It's easy to see why network equipment startups selling flashy new kit in 2003 had such a tough year.

Here's a rundown of some of the startup burnouts we reported this year:

No. 10 Crescent Networks Three months after it declared that it absolutely wasn't closing its doors, this edge router company did indeed cease operations (see Crescent is Waning).

Crescent's routers fared well in tests with BTexact Technologies, the testing arm of BT plc (London: BGC), but it was unable to turn these early trials into revenue-generating sales and shut its doors in January.

After raising $66 million, the assets of the company were sold to British network equipment manufacturer Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) for "tens of thousands of pounds," according to a source familiar with the deal. Did somebody say FIRE SALE?

No. 9 Silicon Access Networks This network processor company's chips were up sometime in October, but it was hard to tell exactly when Silicon Access shut its doors, as it disconnected the phone lines before Light Reading had the chance to report a proper postmortem (see For the Masses).

Nevertheless, our stories leading up to its disappearance shed some light on what happened.

Silicon Access made a big fuss about a deal it claimed to have signed with Huawei Technologies Co. Ltd. in February. The Chinese router company was said to be using its network processor, address processor, classifier, and accounting device for 10-Gbit/s port speeds (see Silicon Access Nabs Huawei).

But for months after this announcement, Silicon Access's competitors insisted the deal never materialized (see Huawei Chip Deal: Who's Got It?).

Silicon Access officials stood by their story. Chief operating officer Rex Naden wouldn't elaborate much, citing Huawei's reluctance to publicly disclose its plans, but at the time he said Silicon Access "absolutely" did sign a contract with Huawei, claiming revenues were on the way.

These revenues never amounted to much, clearly, as Silicon Access has not been heard from since. The company had raised a total of $124 million in funding.

No. 8 Corona Networks IP edge router startup Corona was in business for six years before it eventually kicked the bucket in August (see Corona Networks Disappears).

Corona's end came as a bit of a surprise, as just a few months earlier it had squeezed $8 million in extra funding out of its VCs and clinched a deal with Alcatel SA (NYSE: ALA; Paris: CGEP:PA). The French equipment maker signed a contract with Corona to produce a broadband remote access server (B-RAS) for its 7301 DSLAM (see Corona Gets a Boost).

Then, mysteriously, Corona was spotted in talks with Zhone Technologies Inc. (Nasdaq: ZHNE) around the same time, but this conversation cooled, and Zhone went off looking at other IP edge router/subscriber management services companies.

Did Corona blow it by hedging its bets on both of these deals? Whatever happened, it's time was up. It had raised a total of $78 million in funding.

No. 7 Tenor Networks Tenor Networks raised $120 million to build a giant IP/MPLS switch for service provider core networks. The problem? Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR) had already started building MPLS functionality into their existing routers – thus rendering Tenor's box obsolete before it even hit the shelves. Bummer!

In addition, carriers were looking for equipment that could help them gradually migrate existing ATM services onto an MPLS backbone. The Tenor box required carriers to rip out old kit, which really doesn't go over well in hard times when no one has two beans to rub together.

Tenor tried to change with the times, but it ended up being behind the market with its next product and eventually pulled the plug in February (see Tenor Goes Silent).

No. 6 Metro-Optix Metro-Optix, one of a bunch of startups targeting the next-gen metro-optical networking sector, built and sold its multiservice provisioning system to 15 customers but still failed to keep its head above water (see More Cuts Coming).

As the need for capacity continued to wane, so did many of the startups that were the heroes of optical networking a couple of years ago.

Metro-Optix, which raised a whopping $136 million, ended up auctioning off its assets to Xtera Communications Inc. in a fire sale deal in August, the details of which were never disclosed. One Light Reading reader had this to say about the achievement:

    "I just don't get how the shareholders (ie: VCs) and board could have approved this deal. This is akin to Xtera going out and buying a MacDonald's franchise until the market for its core products (re-)appears. It is inconceivable that the board has allowed the company to continue despite a lack of market for its products, and/or a lack of competitive differentiation." -- Zettabit.

Oddly enough, Xtera, flush with $30 million in funding in August, is still hanging in there (see Xtera Scores Surprise $30M).

No. 5 CeyYa! Ceyba Alas, the same fate did not await Ceyba (formally Solinet Systems Inc.), another optical long-haul startup like Xtera (see Ceyba Shuts Down).

In August Ceyba was abandoned by one of its VCs, which pulled out of a round that was expected to happen later this year. The move set the cat among the pigeons as the rest of board also bailed on the plan, deciding that it was too risky to keep Ceyba going. [Ed. note: And a thousand lemmings can't be wrong!].

Ceyba had at least two U.S. carrier customers and a war chest of $93 million in funding, but this still wasn't enough (see Ceyba Rattling in Ottawa).

Startups like Ceyba were hit hardest by the downturn, because they specialized in products for core network capacity, where the most extravagant excesses of the boom era were focused. What's more, most next-gen equipment for core deployment calls for carriers to commit to a new network architecture that's different from their current, Sonet-based gear. For the majority of 2003, carriers balked at any such changes, as they drop all but the most urgently needed network upgrades.

No. 4 Innovance Networks Another long-haul letdown, Innovance shut its doors in December after failing to secure additional funding, according to several Canadian news reports (see Innovance CEO: Layoff a 'Rebalance', Company Makeover).

Innovance's plan was to provide end-to-end optical transport for carriers, incorporating a kind of "wavelength-on-demand" style of provisioning. With capex spending still frozen and excess capacity still a major problem, Innovance went in-a-trance and never came out again.

The company employed more than 310 employees in February 2002 and had raised more than $130 million in funding since it opened for business in May 2000.

No. 3 Network Photonics Fancy all-optical switching gear featuring tilting mirrors and prisms that split light were all the rage in 2000 when Network Photonics raised a staggering $106.5 million to build some.

Unfortunately, these prisms are now tripping the light fantastic on eBay for $10.99 a pop, as such experimental technology got dropped like a lead balloon during the downturn.

Seriously, though, if you're talking about splitting the atom, or whatever Network Photonics was doing, when everyone else is talking about maintaining the tin cans and string, what do you expect?

The company did attempt to regroup and do something else, but it failed abysmally and eventually shut its doors in April (see Network Photonics Scales Back, Network Photonics Shuts Down).

No. 2 OMM OMM, once the leader of the pack in the all-optical switching game, faced the same gloomy fate as Network Photonics – only its demise dragged on even longer, as most folk expected the company to pull through (see OMM: The End Is Near). The all-optical subsystem vendor had been trying to land more funding since mid 2002, and given that it was shipping product and had paying customers, this didn't seem impossible.

OMM counted Ciena Corp. (Nasdaq: CIEN) and Siemens AG (NYSE: SI; Frankfurt: SIE) among its customers, but it turned out that most of its work was still going into lab trials rather than live networks, which doesn't pay the bills (see OMM-inous News).

OMM decided to take a stab at 3-D MEMS (more light-splitting prisms and tilting mirrors), which no doubt gave the VCs the willies and contributed to their eventual decision to pull out. OMM closed its doors in March, laying off 85 employees. It had raised close to $100 million (see OMM Closes Its Doors).

OMM's demise spelled the end of all-optical switching in 2003. The question now is: Will this sector ever come back?

No. 1 PhotonEx At the top of the pile of companies that hit bottom in 2003 is PhotonEx, which filed for Chapter 11 bankruptcy protection in November (see PhotonEx Falls Into 40Gig Hole).

PhotonEx, founded in 1999, claimed to be selling "the world's only commercially-available, field-proven," 40-Gbit/s, long-haul DWDM systems. To do so, it raised an astounding $178 million in three financing rounds.

"It was a classic case of a company with technology too advanced for what carriers wanted," says Scott Clavenna, chief analyst at Heavy Reading.

Unfortunately for PhotonEx, carrier budgets didn't allow for 40-Gbit/s systems nearly as quickly as the company had hoped. Sources say shortly after the company failed to get any part of the U.S. government's Global Information Grid Bandwidth Expansion (GIG-BE) business, its managers decided to wind down operations.

For anyone who's counting, the total amount of funding raised by these 10 companies was $1.13 billion. Which would almost cover the Light Reading staff's Christmas bonus!

— The Staff, Light Reading

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NightTrain 12/4/2012 | 11:08:16 PM
re: 2003 Top Ten: Startup Flameouts Zillionaire...

I know how much they raised.

I was responding to JackRJ45 and could care less about Photonex, why did you bring them up?

Please try and pay attention.
dwdm2 12/4/2012 | 11:08:16 PM
re: 2003 Top Ten: Startup Flameouts Reporting demise of startups is good... but isn't it a bit one sided? 2003 has also produced many new startups, what about them? More importantly, a critical analysis of the failure is absent. Where did they go wrong? What could they do to survive?

snarfulent 12/4/2012 | 11:08:16 PM
re: 2003 Top Ten: Startup Flameouts In my (limited, perhaps) experience, the money went to excessive head-counts. Back in the olden days (late 90s), startups tried to keep headcount low, compensating by working their employees hard and by trying to keep their engineering goals "focused".

The bubble brought the availability of large investment dollars at high valuations, changing the priorities of a startup to "get to market fast", where "market" really means "liquidity event", and adopting a high headcount was seen as a way to make things happen quicker. Also, instead of producing a single "focused" product to get off the ground, the extra cash led to a tendency to attempt to produce multiple, complementary "line-ups" of products all at once in an attempt to boost valuation at liquidity event (e.g. everybody swinging for the fences).

I tend to suspect that some of these high burn-rate start-ups were also run by first-time start-up management teams lured from their big-company jobs by the promise of big paydays, and they brought with them big-company ideas of staffing requirements.

It's easy to point the finger at extravagance (e.g. Herman Miller Aeron chairs and conference rooms with plasma screen TVs), but it's actually hard to spend $100M that way. What was "new" in this era was the idea that a pre-revenue start-up could have a 250 person headcount.

mrcasual 12/4/2012 | 11:08:16 PM
re: 2003 Top Ten: Startup Flameouts Where does the money go? Lots of places. Most of the companies on the list were in operation during the bubble and as such they faced pretty high operating costs for salaries, rent (especially in the valley), etc.

Some of the listed companies also did silly things like extravagent buildings, etc.

Some simple math, fully loaded rate per head (averaged across execs and pee-ons) for a SJ based company is $175K+ per year. This includes salary, benefits, and infrastructure (rent, etc) costs. If you have a capital intensive business, i.e. full custom ASIC, then your tool costs can also be significant.

Add in extragant offices, lots of travel, SGA, and it's pretty easy to burn $100M in 3 or 4 years if you have a reasonable headcount.
zillionaire 12/4/2012 | 11:08:15 PM
re: 2003 Top Ten: Startup Flameouts I brought up Photonex because they were the #1 flameout on the list that started this posting list, DUMMY.

please try to F.O.
JackRJ45 12/4/2012 | 11:08:15 PM
re: 2003 Top Ten: Startup Flameouts Night train.

My sincerest apologies.

Celox Networks ceased operations on December 18, 2002.

I was off by two weeks on it being a casualty of 2003.

I will try and pay attention in the future.

technonerd 12/4/2012 | 11:08:15 PM
re: 2003 Top Ten: Startup Flameouts Here is an article from the now-defunct Forbes ASAP that explains the VC mentality better than anything I ever read. I'm hoping that because Forbes ASAP is no longer in business, that Light Reading won't delete this posting. It's really a classic article.

Fear and Posing
Forbes ASAP, March 25, 2002

When no one admits ignorance--look out.

What rational person could look at sketchy crosshatches on a whiteboard, ease back in his leather boardroom swivel chair, and cautiously reason that selling anything, especially kitty litter, over a 56K modem, and at a loss, might define a new economy? Not a person, it seems at first, who was possessed of the slightest bit of self-doubt. Unless, perhaps, there were 15 other people in the room telling him that it was so. And yet the only truth, as it turns out, was that he didn't have the courage to argue. This is a scenario as likely as any, along with farcical business models, shoddy equity research, and a deliberate disregard of practical accounting, that led very sophisticated investors to place their money behind gizmos, strategies, and math that they did not understand.

They feared shame--specifically the kind of shame that comes from being perceived as dumb, uncool, or generally not "getting it," all of which foster scorn. Some psychologists refer to this phenomenon as the "Imposter Syndrome."

Just as in junior high math class, the discomfort of confessing ignorance is heightened in the company of others, particularly peers, says Mardi Horowitz, a professor of psychiatry at the University of California, San Francisco. Indeed, the larger the audience, the more threatening and stultifying the experience--and the more likely we are to avoid it. Between 1995 and 2001 the wildebeest-like migration of egos away from three little words--"I don't know"--fueled what might be described as a Moore's Law for dumbness: The crazier the ideas got, and the dumber we felt, the more quickly we acquiesced to them. This empirical scorn-avoidance--what psychologists call "groupthink"--contributed to a $3 trillion shell economy.

"Pride goeth before a fall," says Virginia Turezyn, managing director of Infinity Capital and general partner of Information Technology Ventures, both based in Silicon Valley. In the early years of the Internet boom Turezyn spurned dot-coms. Based as they were on consumer-marketing strategies rather than technology innovation, dot-coms didn't fit with Turezyn's investment strategy. Turezyn, who spent ten years in private equity at Morgan Stanley Dean Witter, is a traditionalist, favoring enterprise software and networking companies such as Aurum Software (acquired by Baan) and Exodus Communications.

Time and again, as business plans predicated on amassing eyeballs over loyal customers passed over her desk, Turezyn balked. "I kept saying, G«ˇThere is going to be a shitload of money lost on the Internet.' All these VCs who thought they were geniuses looked at me like I was a dinosaur. They said, G«ˇYeah, but in the interim there is going to be a lot of money made.'"

By the peak of the bubble in 1999, after others had made monstrous returns off such companies as DrKoop.com and eToys, Turezyn began to doubt herself. "I thought I'd missed it. I was worn down," she says. That year Turezyn made an ill-timed surrender. She invested millions in several dot-coms, including Egreetings Network, a Web greeting-card company; I-drive, a Web-based data storage provider; Great Entertaining, a site that hawked party supplies; and TheMan.com, a content portal for young men. She didn't do it comfortably. "I got consumery," Turezyn recalls woefully. "And I'm not consumery."

Turezyn was posing.

"If you'd asked me then, I could never have told you what the value proposition of TheMan.com was or explain how we were going to make a ton of money," she says. "I-drive gave storage away for free! I'd sit in these board meetings and say until I was blue in the face, G«ˇWe're spending way too much money!' But younger VCs who thought they knew the world said, G«ˇIf we charge, people will go somewhere else.' I started to think, G«ˇMaybe I'm just too old. Maybe I really don't get it.'"

Heidi Roizen had moments where she felt like a poser too, but not always because she lost money. An entrepreneur-turned-venture-capitalist who spent 13 years as the chief executive of software developer and publisher T/Maker Company, Roizen was also an early skeptic of dot-com economics. "In 1997 I was buying puts on Amazon.com shares," she says now, laughing. This means Roizen was betting the share price would drop. "I didn't understand how the business model justified the high valuation the market was giving it. I lost a lot of money doing that. I became convinced that there must be people out there who were smarter than I was."

When she joined Softbank Venture Capital in 1999 (which recently changed its name to Mobius Venture Capital), Roizen put money into several dot-coms. One company that Roizen declines to identify got $2 million from her. She thought it was a good bet, "until they came back to me four months later and said they wanted another round at a post-money valuation of $300 million. I told them they were out of their freaking minds! But damn if they didn't get a term sheet from another firm for a valuation close to $200 million." The new money wasn't dumb money, either, Roizen adds. "These were brand-name investors."

This, Roizen says, is when she felt the twinge of imposter shame most ardently. "I knew I was wrong when companies in my own portfolio were getting follow-on rounds at huge valuations that I couldn't justify. But when someone offers to pay you $2 a share for stock that you paid 10 cents for, are you going to say no?"

Roizen took the money. This was in early 2000. For a while the paper rate-of-return made her, and the rest of the investor group, look very smart indeed. But the company they funded went out of business last year. Does Roizen feel shame? "I came out of those kinds of investments okay. I don't want to say that I was rational and others were irrational. I sat on the board and put down real dollars for those companies. There is some survivor's guilt."

Not surprisingly, psychiatry closely associates feelings of guilt with posing or "imposterism," too. Guilt, after all, is merely an emotional by-product of shame.

Call it what you will, it also afflicts entrepreneurs. Steve Blank, a well-known Silicon Valley "serial entrepreneur," knows the feeling. In the past 24 years he has worked at eight startups and cofounded four others, including E.piphany, a CRM (customer relationship management) software company that made him a billionaire when it went public in September 1999.

"Was that a fluke?" Blank says of E.piphany's success. "Of course. I never finished college. For at least the first two years of my career, I was afraid some day someone was going to find that out and take my job away from me. But it is clear now that everything in the last two to three years was a fluke."

By early 2000, despite being a boom beneficiary, Blank began urging friends and colleagues to sell their Nasdaq stocks. He took seats on the advisory boards of several startups, including a Web-photo finisher, where he began evangelizing the principles of old economy business. "I went to those meetings and started saying things like G«ˇMaybe you should spend that $10 million you just raised on acquiring a customer base rather than building a brand.' The CEO, a really smart woman, told me, G«ˇSteve, you just don't get it--all the rules have changed.'"

Even a self-aware college-dropout-turned-Internet-guru like Blank wasn't immune to the seduction of groupthink. "In the end, I gave great advice, but guess what? I didn't take it," he says. In 2000 Blank wrote six- and seven-figure checks for at least ten startups, including some bizarre concepts such as EthnicGrocer.com, a Webvan-type shop that distributes ethnic food. It seduced other marquee investors from firms such as Kleiner Perkins Caufield & Byers, Benchmark Capital, and Merrill Lynch. Blank figures he's lost money on all but one of his deals from 2000. Design Within Reach, a catalog vendor of custom furniture that Blank funded--to the scorn of the same Sand Hill Road investors who had funded him in the past--has nothing to do with the Web and is growing like gangbusters.

In Silicon Valley, where IQs are lofty and r+¨sum+¨s thick with M.B.A.s and engineering degrees, there is ample opportunity to feel inadequate. Here creativity and brainpower are placed at such a premium that reason is often antonymous to genius. But sometimes the desire to "think outside the box" leads investors and entrepreneurs to endorse things that they know won't work.

"There is so much pressure in the Valley to do the next big thing that there is a natural disposition to find that thing that you are working on to be it," says Subrah Iyar, founder and chief executive of WebEx, a Web-conferencing provider. "Working at a [company in Silicon Valley] is like being in a cult. Nobody wants to be the unbeliever in the room. You learn fast that you can't raise objections. Critics just get left out of meetings."

Sometimes the way to avoid criticism was to lead the meetings. This happened at Quokka Sports, a San Francisco-based media startup that aimed to bring the experience of athletic endeavors such as Nascar racing, the Tour de France bicycle race, round-the-world yacht races, and mountain climbing in Asia to life for all sports enthusiasts--from avid athletes to couch potatoes--who were at home surfing the Web. In five years Quokka raised more than $300 million and issued a public offering of its stock underwritten by Merrill Lynch. The company went bankrupt last year. Michael Gough, Quokka's 25th employee and its chief creative officer and executive producer, explains why: "I was responsible for what the product was and how it would connect with the consumer. Talk about imposterism. I'm an architect--what the hell do I know about media?"

There were many times when Gough says he "was extremely uncomfortable" with his role and the overall strategy at Quokka. One particularly queasy experience came during a meeting with Dick Ebersol, the chairman of NBC Sports in New York City. This was in 1998, two years before the 2000 Sydney Summer Olympics. Quokka and NBC were discussing how the two companies could jointly broadcast the sporting events. NBC would handle the traditional television broadcasts; Quokka would slap cameras and sensors onto swimmers' bodies and then stream real-time underwater video of their laps over the Internet. Only trouble was, Gough didn't have the technology--or even the okay from the Olympic Committee--to do it yet.

"Here I am sitting toe-to-toe with Dick Ebersol, this hugely successful and incredibly admired figure in the sports and broadcasting industries, and my CEO is talking about how Quokka is going to buy ESPN or Disney--about how we would one day be bigger than NBC. I felt about one inch tall."

Gough was responsible for presenting Quokka's programming strategy for the games. "I had a vision. I'd brainstormed for about two weeks. It was very, very abstract. NBC's presentation was very specific. They'd been working on it for two years. They had interviews, time slots, everything mapped out,'' he recalls. "They looked at me like they knew what we were doing. This was supposed to be us G«ˇtaking them by storm.' I felt like a poser."

Never mind. Ebersol bought the Quokka "vision," and the two companies eventually broadcast the games together in August 2000. A year later Quokka was bankrupt, forfeiting, among its assets, the rights to Webcast future Olympic Games.
technonerd 12/4/2012 | 11:08:15 PM
re: 2003 Top Ten: Startup Flameouts It's hard to understand how some of these companies managed to get through these huge (nine-figure!) sums. Where does the money go? Did the VCs pull it back? Do the founders get to take it with them? Did they drop it on the way to the bank?
One of the most eye-opening experiences of my life was to hang out with leading venture captialists in the late '90s and early '00s and observe how they do their jobs. Some observations:

1. It's not their money. VCs are no different than mutual funds or banks. They collect money from someone else and take a rakeoff on the total assets managed. Sure, if they succeed they do much better than if they fail. But either way they make a very nice living.

2. They are not investors. VCs don't get in early. They actually get in fairly late in the game, maybe a couple of years before a company goes public. VCs are pre-IPO speculators. The ones who get in early are the "friends and family" investors, and they almost always get screwed as a result of VC involvement.

3. They don't know much. I never met a telecom VC who knew even the basics about telecom networks. They don't do any meaningful technical due diligence and they have no business knowledge. It's all about "the deal." This is why so many frauds happened.

Where did the money go? The enterprises spent it. The VC firms rarely get anything back, but along the way the VCs themselves (especially the big names) used their positions to make huge speculative trading profits in new issues. This aspect of the late '90s corruption has never been explored, and because the media and the government are so completely bought off it never will be.
NightTrain 12/4/2012 | 11:08:14 PM
re: 2003 Top Ten: Startup Flameouts What? Technonerd, please don't post if you don't know what you're talking about. Please see my comments in all caps.

[2. They are not investors. VCs don't get in early. They actually get in fairly late in the game, maybe a couple of years before a company goes public. VCs are pre-IPO speculators. The ones who get in early are the "friends and family" investors, and they almost always get screwed as a result of VC involvement.]


3. They don't know much. I never met a telecom VC who knew even the basics about telecom networks. They don't do any meaningful technical due diligence and they have no business knowledge. It's all about "the deal." This is why so many frauds happened.


Where did the money go? The enterprises spent it. The VC firms rarely get anything back, but along the way the VCs themselves (especially the big names) used their positions to make huge speculative trading profits in new issues. This aspect of the late '90s corruption has never been explored, and because the media and the government are so completely bought off it never will be.
NightTrain 12/4/2012 | 11:08:14 PM
re: 2003 Top Ten: Startup Flameouts Ah Zillionaire, I know who you are. A disgruntled St. Louis Celox employee come back to bemone your misfortune. Pathetic. You amuse me.
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