IPOptical Races the Clock

IPOptical Inc., the core routing startup that took on Alcatel SA (NYSE: ALA; Paris: CGEP:PA) in court and settled with the French equipment giant back in December, is running out of time as it seeks its second round of funding (see Alcatel Settles Suit for a Chunk of Startup).

Sources close to the company say the company is close to running out of cash and is preparing to close its doors.

Sasmith Reddi, director of technical marketing for IPOptical, said today that those predictions are premature. He says the company expects to close a $20 million to $30 million round of funding sometime in the next two weeks.

“Shutting down might be the case later on,” he says. “But at this point we are looking at multiple investment opportunities. The current market conditions aren’t making it easy, though.”

The company got off to a rough start in the spring of 2000. In June, Alex Mondrus, IPOptical’s chairman and chief executive officer, was sued by Alcatel (see Alcatel Sues Former Employee and Alcatel's Former Employee Fights Back). Mondrus had been an engineer at Alcatel working on the 770 Routing Core Platform, its core routing project, before he started IPOptical. Alcatel accused him of stealing product plans and poaching key engineers from Alcatel to come work for him prior to the company’s launch. Despite the six-month legal battle, the company was able to raise $8 million in its first round of funding in October 2000 from Amp Capital Partners and Agilent Technologies Inc. (NYSE: A), based on a $30 million valuation.

Recently, the company, which says it is developing a scaleable routing system to rival those of other companies like Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) and Pluris Inc., seemed to be gaining momentum. The company named two prominent service provider executives to its board of directors: Kevin Boyne, former chief operating officer of UUNet, and Mike O’Dell, senior vice president and chief scientist of UUNet (see O'Dell Joins IPOptical Board). And it had ramped up its staff to about 90 employees.

But Reddi acknowledges that the company is halfway through its development stage and in desperate need of a cash infusion. When asked how much longer the company could survive on its current funds, Reddi said he couldn’t comment.

“It’s hard for everyone right now. VCs have to work out their own issues. We’re still looking for a lead investor. But we don’t expect we’ll have to lower our valuation.”

That may be the problem. VCs surveyed by Light Reading in the past month say that nearly every company seeking funding this year has been forced to take a "down round," in which their current round of investment comes in at a lower valuation than the last one. And entrepreneurs who fight this trend risk not getting any money at all.

As Reddi retains optimistic that the VCs will pull through with the cash, the company also has significant challenges in addition to funding, considering the current state of the core router market. Just look at Juniper Networks Inc. (Nasdaq: JNPR), considered a leader of the market along with Cisco Systems Inc. Juniper, which had been the darling of Wall Street for cracking into the core routing market and taking market share from Cisco, recently announced it will miss its sales targets for this quarter, and it has lowered its guidance for the next few quarters (see Core Slowdown Hits Juniper). This miss, along with disappointing results from Cisco, is a good indication that growth in the core routing market is slowing.

What’s more, building core routers is not easy by any stretch of the imagination. Many companies have tried and failed miserably. Nexabit, Ironbridge, and Netcore are the names of a few startups that attempted to build core terabit routers and that were either acquired (Nexabit by Lucent Technologies Inc.; Netcore by Tellabs Inc.) or shut down altogether (Ironbridge). Nortel Networks Corp. (NYSE/Toronto: NT) just announced this week that it's slashing development of its core router (see Nortel 'Rightsizes' Terabit Router).

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