Inkra has received its second round of funding, but will that be enough to carry it to profitability?

August 26, 2002

4 Min Read
Inkra Bags $30.1M

Inkra Networks, a startup maker of switches for carrier and enterprise data centers,has received $30.1 million in a funding round led by Morgenthaler. The round, which is the first since the company’s initial financing in 2000, brings its total funding to date to $66.6 million (see Inkra Scores $30.1M).

Morgenthaler, a new Inkra investor, was joined in this round by the company’s existing investors, Battery Ventures, Norwest Venture Partners, Storm Ventures, and Greenstone Venture Partners.

The capital injection should put to rest some fears that the company is running dangerously low on cash. It also gives Inkra a shot at the big time in a market that's just starting to emerge.

“Without funding, I imagine [Inkra] wouldn’t have a path to profitability,” says Dave Passmore, an analyst with the Burton Group. “With it, they might.”

Plenty of challenges remain. Inkra’s switches, the Inkra 1500 and the Inkra 4000, replace data-center customers’ individual dedicated equipment with “virtual racks,” accessed through software commands. According to the company, this dramatically cuts both capital and operational spending (see Inkra Virtualizes Data Center).

But buying the boxes themselves is no small investment, and according to some observers, the up-front cost could dissuade customers from signing on. While the 1500 is going for as little as $25,000, the price for Inkra’s high-end box starts at nearly $100,000. “[In the current market], the high end isn’t exactly where it’s at,” says John Morency, an analyst with Sterling Research.

So far, Inkra has announced only one paying customer: Savvis Communications (Nasdaq: SVVS) (see Inkra Sells Some Switches).

This market has already taken its toll on at least one other startup, Nexsi, which burned through $90 million building its own data-center switch and had to shut its doors for good in April (see Nexsi Hits the Exit).

Inkra claims its business model is fundamentally different from Nexsi’s, and that its ability to squeeze by with minimal capital and operational spending is what convinced the investors to chip in for a new round. “We used our first round of financing very carefully,” says Inkra CEO Sanjay Dhawan. “Our prime objective was to show a strong balance sheet.”

Negotiations on the second round started about two months ago and closed earlier this month, according to Dhawan, who says that since the company has started signing on paying customers, it doesn’t anticipate having to raise any more funds in the future. “An IPO absolutely remains the goal,” he says.

In connection with the funding round, Ken Gullicksen, a partner at Morgenthaler, has joined Inkra’s board of directors. Gullicksen was previously the founder and CEO of FiberStreet, a Gigabit-network service provider.

Morgenthaler focused on the front end of the data-center market for several months. It looked at 30 to 50 companies in this space before investing in the Fremont, Calif.-based Inkra, according to Gullicksen. He wouldn’t say which other companies Morgenthaler considered. “There are a lot of small vendors [in this space],” Gullicksen says, “but not a single dominant incumbent player. We were looking for a best-in-class vendor… Where Inkra really stood out was their virtualization story.”

While observers agree that it’s quite a feat for any company to receive a sizable funding round at a time when investors have fastened their purse-strings with double knots, Passmore cautions that in a down-round, employee equity could be completely wiped out. “The VCs are left owning the entire company,” he says. “That’s generally happening across the board right now… Two years ago, the employees were left in a much stronger position [after a funding round].”

Inkra spokesperson Kristin Kiltz admits that the company received the additional funding in a down round. She insists, however, that the value of the company increased from the previous funding round to this round, and that employee ownership of the company remains strong.

Inkra says it will use the new investment to expand its sales, support, and business operations worldwide, especially through strategic partnerships.

Partnerships are definitely the way to go, according to Morency. “Given where the economy is right now,” he says, “for someone like Inkra, it ain’t going to happen… You can’t establish a new market and gain interest for it all on your own.” Having a “big brother” to help ease the company into the market space could really help, he says.

Inkra has already announced several large partnerships in Asia (see NEC Distributes Inkra).

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com

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