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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rubley 12/4/2012 | 8:26:13 PM
re: BBO Files for Bankruptcy Protection I started at BBO in Feb. 2000, left on my own terms right before the first layoffs.

BBO was never a startup. There was no leader, there was no vision. It was a bunch of rich people trying to become even more rich. Most people could sense something was wrong when the split happened and Zephion was formed.

People were hired at an unbelievable rate. Jobs were created out of thin air for the simplest tasks. Money was spent without any hesitation.

BBO was born at the wrong time. They were born at a time when spending money like crazy and cashing in on a quick IPO was the cool thing to do. Unfortunately for them the market cooled off before they could get their IPO out of the gate.

Basically the exit strategy for BBO was to give birth to Zephion and leave BBO with all the debt.
BBO is a decoy for creditors.

I feel bad for the people that worked hard and wanted BBO to succeed, but I don't feel bad for the majority of people who sat around doing nothing waiting for their stock options. Too many people took it for granted that BBO would be a success.

BBO should have launched in one city first and tested the waters. Instead they spent 100's of millions of dollars on equipment and launched in something like 13 cities simultaneously with an unproven business plan.

gswcgrd 12/4/2012 | 8:26:10 PM
re: BBO Files for Bankruptcy Protection Now that BBO is gone, what will happen to it's sister company Zephion? Won't the burden of survival be shifted to this poor company?
terrabit 12/4/2012 | 8:24:54 PM
re: BBO Files for Bankruptcy Protection BBO's BBankruptcy announcement has affected my last paycheck(s). While avoiding drowning in the coorporate world by protecting themselves they have again left those who whole heartedly believed in the success or more realisticly put where spoon fed alot of $#%^ and convinced that this company was going somewhere to the top out cold and paycheckless. Thanks alot BBO/Zephion.
BBENT Over by BBO 12/4/2012 | 8:24:44 PM
re: BBO Files for Bankruptcy Protection http://www.deb.uscourts.gov/wc...
BBENT Over by BBO 12/4/2012 | 8:24:43 PM
re: BBO Files for Bankruptcy Protection "Employees were told they would receive paychecks through this Friday and they would not be getting any severance. GÇ£Unfortunately, we regret that due to BBOGÇÖs severe financial constraints there will be no severance pay,GÇ¥ reads the letter."

This part turned out to be a typical BBO style lie. BBO issued payroll checks and sent them out dated 2 days after they filed for chapter 11 and 3 days after they filed for Chapter 13 protection. Not only is this highly immoral buy it is also not legal in any way to write checks that are known to be bad.

Let this serve as a lesson to all of the companies out there looking for new top Brass. Hold off on the ones listed below. Because they are not only slimy but they lie to employees as well. If you were to have a poll on most un-admired people in Telco I am sure that they would be at the top of the pile (of you know what).

In hindsight I suppose that the reason that they went ahead and issued the checks was to give the locksmith time to change the locks so the lynch mob and looting mob had a more difficult time...

Once again I would like to suggest steering clear of the following people due to being tarnished. In other words they are straight dirty.

Dan Chu
Michael Shannahan
Rachelle Chong

Julian Chang
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