Chiaro Lands an $80 Million Round

Ever hear of a five-year-old stealth company?

We give you Chiaro Networks, which today secured $80 million in funding (see Chiaro Scores VC Funding). This is the company’s fourth round of funding since it was started in March 1997, bringing the total amount raised to roughly $210 million. But the company has still not revealed details about its product.

“We’re still in stealth mode,” says Ken Lewis, president and CEO of Chiaro. “We’re still not ready to talk about specifics.”

Previous investors, Center Point Venture Partners, InterWest Partners, Rho Ventures, Sevin Rosen Funds, and Star Ventures, led the round. New backers, Delta Ventures Ltd., LandHo Ventures, and Poalim Capital Markets, also came on board.

Lewis wouldn’t divulge details about the round. He did say that the company’s valuation was down from its last round but still in the triple-digit millions (pre-money). He emphasized that, unlike other startups, such as Pluris Inc. and Caspian Networks, this was not a "washout" or "cram-down" round (see Washout Rains $53M on Pluris and Washed Out in the Valley). [Ed. note: Nor, apparently, was it a cram-out or washdown round.]

What makes this funding noteworthy -- aside from its size -- is the fact that the company still has no publicly known product plans. In its earlier days, when the company was closing $100 million rounds, it was reported that it was building an optical convergence switch that would compete with the likes of Native Networks Ltd. and Luxcore Networks Inc. (see Chiaro Gets $100M for "Optical Router" ).

Now, two years later, the story seems to have changed. Lewis says the company is building a scaleable core IP router and not an optical convergence switch, as was first believed. This would put the company up against some heavy hitting incumbents, namely Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR), which together control more than 99 percent of the market (see Juniper Sinks in Market-Share Scare).

“I have no clue what [Chiaro] is doing,” says one equities analyst who covers both Cisco and Juniper. “I always thought they were an optical switch company -- but who knows?”

Has the company changed direction or has it simply been stuffed into the wrong pigeon-hole? Lewis says the industry is confused. He says the company started out, back in 1997, developing optical technology in Israel. But after a few quarters, the venture capitalists and founders decided it was a better idea to build an IP router using some of the optical technology it had developed. So the company began working on a scaleable IP router and moved its headquarters to Texas in 1999.

“There is a lot of misconception out there about who we are, because people haven’t seen much about our product,” says Lewis.

While he wouldn’t give out details about the product, Lewis did clear one thing up: “We are an IP infrastructure company. Our strategy is to leverage some breakthrough optical switching technology to build a highly reliable and scaleable IP router. The 'secret sauce' is in the optical hardware.”

Lewis claims the company has been working with several customers. But actual trials aren’t expected to begin until next month, with revenue expected late this year or early in 2003.

Will Chiaro be able to pull it off in the end? That is still to be determined. The market for scaleable routers is not expected to take off until at least 2003, so Chiaro’s timing could be right. But Steve Kamman, an analyst with CIBC World Markets, who recently published a report on core routing, warns that the company will need strong hardware and software to leap ahead of the rest of the pack.

“The core router business is about 25 percent hardware and 75 percent software,” he says. “It’s not enough to just have good hardware. Many companies have stumbled getting the software right.”

Lewis agrees that software is an important element and says the 216-person company has done all it can to recruit the best routing talent in the Richardson area.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com