Ellacoya Gets a Blue-Chip Backer

Ellacoya Networks Inc. hasn’t officially announced its flagship product yet, but it’s hot and headed for an IPO within the next year. Who says? Goldman Sachs & Co. (NYSE: GS).

Today Ellacoya announced that Goldman led the startup’s second round of funding, worth over $52 million, bringing its total to $86 million. Previous investors, including Lightspeed Venture Partners, Bessemer Venture Partners, Centennial Ventures, and Lighthouse Capital Partners, also contributed to the round. (Disclosure: Lightspeed is an investor in Light Reading.)

This announcement is interesting on two levels. First, Ellacoya’s ability to raise $52 million is impressive, in view of the poor conditions on Wall Street. But to also have the round led by one of the most notable investment banks on the Street is even more of a reason to look twice at Ellacoya.

“This shows that Goldman believes they are IPOable,” says Frank Dzubeck, president of Communications Network Architects Inc. “There is potential there. It’s no different than any other VC investing in them, but this one happens to have really big pockets. And it's Goldman, and that has its own aura.”

To understand why Goldman is keen on Ellacoya, you first have to look at the challenges facing service providers. On the one hand, they’re under increasing pressure to make money out of the infrastructure they’re deploying – and that means offering personalized content-driven services rather than plain vanilla Internet connectivity. On the other hand, they desperately need to automate provisioning processes, so they can cut costs and respond faster to customer requirements (see Automate or Suffocate ). Ellacoya addresses both these issues.

The startup is building a broadband aggregation IP switch that will sit at the edge in a service provider point-of-presence and will dynamically provision IP services. Unlike other vendors like Shasta, which was bought by Nortel Networks Corp. (NYSE/Toronto: NT), or CoSine Communications Inc., Ellacoya is not pigeonholed to a specific service like virtual private networks (VPNs). Instead it will be able to provide a broad array of services, including voice over IP and VPNs as well as specific applications that are outsourced by application service providers.

For example, Vcities, an early adopter of Ellacoya’s technology, hopes to use its platform to provide video conferencing and outsourced applications on demand.

“We could offer these services without the Ellocoya switch,” says Russ Medina, CEO of Vcities. “But we wouldn’t be able to do it dynamically. Customers need to be able to get the bandwidth they need for video conferencing or whatever other application they are running when they want it. They need to be able to turn service on and off. And then pay for what they use.”

What makes Ellacoya unique is the combination of software and hardware and its use of directory services to manage traffic at the content and application level (see Ellacoya Elaborates ). Specifically, the switch leverages lightweight directory access protocol (LDAP), a standard object-oriented directory protocol, to layer subscriber information on top of user information in a service provider’s existing LDAP directory. That information is stored centrally in a database and is pulled down to individual ports to create a distributed directory that is accessed quickly when traffic is aggregated through the box. Service providers or even their customers can then use a Web interface to set up new services, increase bandwidth, or use applications on demand.

Ellacoya isn’t the only vendor out there professing that it has the answer to on-demand IP service provisioning. Redback Networks Inc. (Nasdaq: RBAK), the first vendor to come out with an aggregation box, also claims that it’s headed in this direction. But some analysts believe there is a marked difference between the two products, and it has to do with scale.

“When you peel back the covers, Redback is architected on a PCI [peripheral component interface] bus,” says Dzubeck. “I’m not faulting them for that. It got them into the market quickly, but it doesn’t scale.” (see Rocky Times For Redback? ).

While Ellacoya isn’t ready to reveal the details of its hardware, some analysts who have already been briefed on the technology seem to be optimistic that it has the right stuff.

“It’s a big box and, believe me, it will move and groove,” says Deb Mielke, principal at Treillage Network Strategies Inc. “They have figured out how to marry the intelligent software with the hardware and still get a lot of horsepower out of it.”

Ellacoya is already shipping a reduced version of its product and says that through this mini-iteration it is working out potential software glitches. Its bigger platform won’t be commercially available until the middle of 2001. So far, Ellacoya has only sold its switch and software package to small service providers; it's yet to land a kingmaker contract.

It’s clear that Goldman’s endorsement is a precursor to an IPO, which Ellacoya officials say could happen at the end of next year.

“This round will put us well inside our first customer shipment, and we’ll be generating revenue,” says Mike Welts, VP of marketing for Ellacoya. “And hopefully the market will recover and we’ll head toward an IPO.”

Some of Ellacoya’s partners who are also focusing on this idea of dynamic services are hoping that the startup's coat tails will be long enough to drag them along the IPO path, too.

Vcities, which had partnered with Lucent Technologies Inc. (NYSE: LU) early on, has had a difficult time raising cash in the constrained capital market environment. But the service provider hopes that the Goldman investment in Ellacoya will send a message to others in the industry that players focusing on service provisioning are hot companies to follow.

“It’s important to have good partnerships,” says Vcities' Medina. “If Ellacoya’s success spells success for others that are around them, then that would be great for us.”

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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