Alcatel Reins In General Bandwidth

Sources have revealed to Light Reading that voice gateway startup General Bandwidth Inc. was down to its last chunk of cash -- and still burning it -- when it decided to do a deal with Alcatel SA (NYSE: ALA; Paris: CGEP:PA). That deal, which includes a $15 million investment, appears to have injected General Bandwidth with new life.

General Bandwidth turns five years old this month, a noteworthy milestone for any private telecom company. But according to sources close to Alcatel's recent investment, Alcatel now has a big influence on General Bandwidth's future.

Alcatel agreed last month to be the lead investor in General Bandwidth's Series F financing, a move that gave the French company a significant ownership stake (see Alcatel Salutes General Bandwidth). Sources say Alcatel now owns more than 20 percent of General Bandwidth after investing at a pre-money valuation of $45 million. Later this year, Alcatel will invest another $5 million in General Bandwidth as the company completes subsequent closings of its Series F round, sources say.

Alcatel gets the right to buy General Bandwidth should the startup's net cash drop below $3 million at any time in the next two years after the initial closing of the Series F financing, according to sources familiar with the deal, including several shareholders. If that "trigger event" happens, the company would go to a third-party investment bank to determine the fair market value, according to those familiar with the terms.

That $3 million target is key, as General Bandwidth's cash and investments, as of March 31, were only about $2.3 million, according to sources close to the company. With less than $500,000 in revenues during the first two months of this year, the company is spending more on operations than its sales can support, sources say.

Also, after the two-year anniversary of the first closing of the Series F financing, Alcatel has the right to refuse any offer to acquire General Bandwidth that is made by certain Alcatel competitors. Sources could not identify who those "certain competitors" were.

Brendon Mills, General Bandwidth's president and CEO, says he can't talk about the specifics of the private company's finances, but notes that Alcatel's investment terms were "comparable to that of any late-stage investor."

Sources close to General Bandwidth say the company has been up for sale since late last year, when it hired UBS Securities to find a suitor.

Mills can't comment on those specifics, but says the company did weigh the advantages of selling versus raising another funding round. "We believed that an acquisition using today's comp[arable]s is not going to give us the outcome we wanted," he says.

"We had bankers involved at various points in the company," he adds. "Obviously, you leverage bankers in a number of different ways."

With new light shed on its finances, it's clear that Alcatel's investment in General Bandwidth marks a major turning point in the startup's life.

General Bandwidth was started in 1999 and has raised more than $170 million to date. With most of that capital now gone, the pressure is on Mills to salvage the company's valuation and find it a desirable exit strategy.

Early on, the company's gateway product was aimed at the voice-over-DSL market for RBOCs, a market that didn't pan out. Fortunately, though, the company was able to take its technology in a new direction, without aiming for a new customer set or starting from scratch (see General Bandwidth to Demo VODSL).

Before it gained significant customers, it spend a load of money getting attention at industry tradeshows. It frequently hired major-label rock bands to play private concerts at its tradeshow parties and, according to sources, it spent nearly $50,000 on show-related activities last June and July.

Now General Bandwidth is a quieter company. It has 37 customers, but its headcount has fallen from 225 employees in 2000 to about 79.

In the near future, its hopes are pinned on its role as the voice switching component to Alcatel's Litespan digital loop carrier product line. Its G6 box allows Alcatel to provide voice, video, and data services via fiber and helped the French firm bag SBC Communications Inc. (NYSE: SBC) as a fiber-to-the-premises (FTTP) customer (see General Bandwidth Inks Alcatel Deal, SBC Picks Alcatel for FTTP). Next year, more than 50 percent of General Bandwidth's revenues will come from its FTTP business, according to Mills, up from about 30 percent now. The company also plans to announce some key relationships in its cable telephony business, he says. That announcement will help General Bandwidth counter its rival, Nuera Communications Inc., which just announced a deal with Nortel Networks Ltd. (NYSE/Toronto: NT). (See Nortel Ups the Ante on Cable VOIP.)

While General Bandwidth isn't married to Alcatel, its last funding round prevents it from being completely footloose and fancy free (see Let's Make a Deal). Mills says his company is "autonomous" as far as its exit strategy is concerned. But it remains "monogamous to Alcatel" in the FTTP market.

— Phil Harvey, News Editor, Light Reading