BBO Files for Bankruptcy Protection

Is Kleiner Perkins Caufield & Byers’s star venture capitalist Vinod Khosla losing his touch for catapulting companies into hot initial public offerings? BroadBand Office Inc., one of Khosla’s top picks, filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in the district of Delaware late yesterday afternoon.

The BLEC (building local exchange carrier) is currently in talks with potential buyers, says Rachelle Chong, general counsel for BBO. “We don’t know what is going to happen at this point,” she says. “There are several buyers we are talking with, and if it comes to fruition the buyer would take the existing BBO customer base.”

One source close to the company speculates that Qwest Communications International Corp. (NYSE: Q) has expressed interest in the company's assets, but Chong would neither confirm nor deny it. Qwest officials also declined to comment on the rumor.

In a letter distributed to employees, company executives said that nearly all of the 435 employees would be laid off effective Friday. Approximately 30 employees will remain for about a month to help maintain services until customers can transfer to a new provider or, if an acquisition ensues, move them over to the buyer, says Chong.

Employees were told they would receive paychecks through this Friday and they would not be getting any severance. “Unfortunately, we regret that due to BBO’s severe financial constraints there will be no severance pay,” reads the letter.

“I’ve seen this happen at smaller mom-and-pop type companies,” says one former BBO employee, who had worked for a large public software company before coming to BBO. “I certainly didn’t expect anything like this, especially from a Vinod Khosla company.

“We believed that the guys at Kleiner would have an ace up their sleeves and that they’d do something to turn the situation around,” he continues. “My wife worked for one of Vinod’s startups before, and she kept telling me that he was not the kind of person that would let the company totally fall apart. It was very surprising to both of us.”

Khosla, who is now on sabbatical from Kleiner Perkins, has cultivated a string of successful startups. Juniper Networks Inc. (Nasdaq: JNPR), Redback Networks Inc. (Nasdaq: RBAK), Qwest, Corvis Corp. (Nasdaq: CORV), CoSine Communications Inc. (Nasdaq: COSN), and ONI Systems Inc. (Nasdaq: ONIS) are just a few of the companies he has helped bring to profitable IPOs. He also helped bring the world Cerent and Siara, companies that were acquired by Cisco Systems Inc. (Nasdaq: CSCO) and Redback back in 1999. And he has had a successful hand in young service provider companies like XO Communications Inc. (Nasdaq: XOXO) (formerly Concentric) and Rhythms Netconnections (Nasdaq: RTHM).

At times he has been referred to as a guru -- a reputation which has placed him at the top of Light Reading’s Movers and Shaker’s list time and again (see Vinod Khosla and The Top Ten Movers and Shakers in Optical Networking). People have laid bets on companies just because his name has been associated with it. But times are different now, and Khosla’s golden touch has been tarnished by a tougher funding environment. BBO isn’t the only one of his startups struggling. Zaffire Inc. has also announced layoffs (see Zaffire Fires 20% of Sales Team), and rumors that the company is in trouble have been circulating for the past few months. Even some of the companies that had successful IPOs are starting to wane. Cosine and Corvis, two of his more recent IPOs, are both trading in the single digits.

BBO was already in trouble late last year when Kleiner Perkins started diverting funding and resources away from it and investing them in a new service provider called Zephion, say former employees (see Kleiner Readies BBO's Rebirth).

“Things started to look bad back in December when they split out Zephion,” says another former employee, who didn't want his name used. “We were missing product deadlines and changing deadlines. Kleiner never really had a handle on what was going on here. We were their Achilles heal.”

While the company's letter to employees blamed the situation on the current market conditions, those who worked there say the problems had more to do with a lack of leadership than anything else. Dan Chu, who co-founded the company when he was still an associate at Kleiner Perkins, has been running the day-to-day activities at BBO as president, while the company looked for a permanent chief executive officer. What’s more, the company was also without a chief financial officer until early this year, when Mike Shanahan was hired. As a result, spending got out of control, says one source, who claims that the company’s debt rang up to nearly $40 million. Chong would not comment on specifics.

“There was no control,” says the employee. “We had people on both coasts duplicating efforts, just burning money. And there was always someone else beating on the door to get paid.”

In March, the financial problems forced the company to lay off 69 employees, mostly out of its Virginia office. Back then company executives said they were just re-organizing (see BBO Says BBye to 69 Employees).

Kevin Compton, a BBO board member and general partner at Kleiner Perkins, says there is still hope. “We are not closing the doors yet,” he says. “We’re fighting for another day here, and at this point we’re not giving up.”

-- Marguerite Reardon, Senior Editor, Light Reading

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smw 12/4/2012 | 8:26:48 PM
re: BBO Files for Bankruptcy Protection At least BBO had the "courage" to file BK.

Another BLEC, Urban Media, was in a simimar situation...poor management, no fisical controls, shakey technology, etc. and fired all of its employees (500) owing them all money. The CEO said they were filing BK within weeks if they could not find a buyer or partner. Four months later, they still have not filed although they continute to employ (pay) several execs and continusouly fight off comp claims filed by employees who are owed large ammts. of back pay.

Market conditions do damage but not as much as bad management.
lie treading 12/4/2012 | 8:26:46 PM
re: BBO Files for Bankruptcy Protection There seems to be a whole host of people in the
industry from his part of the world who are
insufferable in the same way. Many of them
have not been nearly as succesful.
photonic314 12/4/2012 | 8:26:43 PM
re: BBO Files for Bankruptcy Protection True few have been as successful...but few have been as ruthlessly shameful either...

The kind of success that provides great payoffs for the VC and top management on the backs of the good talented employees believing the dream that was sold to them about creating something great, only to get no severance package in tough times...is ruthless and shameful...

I wonder how much it would take for Vinod to dust off some of his shrinking billions, and give some to the 435 of BB2...it would be a drop in the bucket!

But now Vinod is off on a vacation enjoying his stake!

Entrepreneurs create and build and great companies are started by visionaries, looking to make a difference and to create fertile environments for individuals to maximize their potentials...

VC'S SUCK the marrow of life out of business the minute revenues fall off by .000001%! They take the money and runGǪ

Well clearly morality and VCGÇÖs will not be found in the same definition.
kupfi 12/4/2012 | 8:26:42 PM
re: BBO Files for Bankruptcy Protection once baron of bandwidth now (billionaire )buffoon

BTW, he also founded SUN microsystems
gardner 12/4/2012 | 8:26:40 PM
re: BBO Files for Bankruptcy Protection VC's primary business is to make money. Forget the other BS.Vinod did pretty good at making money. In the current environment some of his companies are not doing good. Why is it all his fault?

I'm sure it is not all his fault but it was also not all to his credit when things were looking good. What people resent I think is when the high rollers act like geniuses when things are good and then blame the market when things are bad.
If Khosla or any other high fliers and high rollers of the i-economy are feeling sorry for themselves because people aren't treating them like gods anymore then I suggest they reflect on the fact that if you take credit for the good times you gotta be ready to own up to the bad times. Otherwise you deserve the contempt others heap upon you.
gardner 12/4/2012 | 8:26:35 PM
re: BBO Files for Bankruptcy Protection once baron of bandwidth now (billionaire )buffoon
BTW, he also founded SUN microsystems

Well, as all the partisans of the new economy are quick to point out: it's not what you did it's what you are doing now. Gotta get that fresh blood in the door. This crop of VCs is just sooooo last year, last century, last millenium. ;=) I don't know about you but I love to watch the rich and arrogant end up being ridiculed. It's good for their souls and ours. ;-)
redface 12/4/2012 | 8:26:29 PM
re: BBO Files for Bankruptcy Protection Gardner,

I agree with your comments. Remember John Doerr, the other high flyer at KPCB? Where is he now, crying in a corner somewhere over his dot-com corpses, with eggs all over his face?

I remember one Light Reading article which calls Vinod "the King maker". Having some intimate contact with Vinod and KPCB and witnessing first hand their arrogance and nearsightedness, it definitely feels very good to see them suffer.
networking_legend 12/4/2012 | 8:26:29 PM
re: BBO Files for Bankruptcy Protection "Having some intimate contact with Vinod and KPCB and witnessing first hand their arrogance and nearsightedness, it definitely feels very good to see them suffer."

Oh Please!

Tell me, how does a multi-billionaire "suffer"?
gladysnight 12/4/2012 | 8:26:21 PM
re: BBO Files for Bankruptcy Protection "Market conditions do damage but not as much as bad management." - smw.

It occurs to me that bad management IS one of the market conditions.

In an environment where virtually any idiot with a suit can be put in charge of 100's of millions of dollars and 1,000's of careers, why does it surprise you that lots of idiots were buying suits and being put in charge . . etc?

Seems to me we all have collectively been taught a big lesson in real value (and real values) and the dangers of manias, stock bubbles, and other irrational behaviour.
photonic314 12/4/2012 | 8:26:18 PM
re: BBO Files for Bankruptcy Protection You may think having billions is everything...when you live your life with a bases on ego stroking...there is never enough money if money is how you judge yourself...VK has had an ego check recently among other high flying, VC's...

Why do you think he is on sabatical...because he wants to enjoy his billions...na...he his sulking...

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