Kleiner Perkins Builds Backbone Carrier

Chomp, chomp, chomp.

Christmas is over, and that noise isn't granny snacking on a drumstick. It's the sound of Kleiner Perkins Caufield & Byers taking a bite out of BroadBand Office Inc. (BBO) and spitting it out as a new long-distance carrier.

According to several Light Reading sources, who each requested anonymity, the venture capital firm is planning to divert resources away from BBO -- the competitive local exchange carrier (CLEC) it started with several commercial real estate firms -- and use them to build a new carrier, code-named Domino.

The new outfit will focus on selling long-distance IP-based services to corporations and other carriers. To distinguish itself from other corporate and wholesale carriers such as WorldCom Inc.'s (Nasdaq: WCOM) UUNet division, Domino is building its own "private" Internet backbone, which won't be over-burdened by having to carry public Internet traffic. This will enable Domino to offer advanced IP services, such as voice-over-IP, while guaranteeing specific levels of quality of service (QOS), sources say.

Meantime, BBO will continue to concentrate on providing a menu of network services to tenants of commercial buildings. BBO, thanks to its commercial real estate investors, has either installed equipment or won the right to offer network services in more than 20 percent of the commercial office space in the U.S.

Domino's management team isn't complete yet, but word has it that its engineering staff is chock full of talent. Johnson Agogbua, formerly the VP of engineering at BBO, leads the firm's technical team (prior to BBO he was the former head of global infrastructure services at UUNet). The group also reportedly includes Kenneth Frank, former director of network architecture for BellSouth Corp. (NYSE: BLS); Dave Rennyson, who worked in operation support services at Bell Atlantic; and several technical heavyweights that defected from UUNet -- including Rick Wilder, Bill Barnes, Donald Cheng, and Martin Hakim Din.

Splitting out BBO resources and using them to forge ahead into a new market could be a profitable move for Kleiner Perkins and the other BBO investors. But it also has the potential to weaken the young CLEC. So why do it at all?

The answer could be that, like other startup CLECs, BBO is not gaining traction as quickly as the company, and its backers, had hoped. BBO won't say how many customers it has or what its revenues are, but its peers have been stung as the financial markets have turned against CLECs. For instance, in mid-December 2nd Century Communications laid off 172 workers -- half its staff -- and closed eight of its 13 regional offices.

Further, BBO is having funding trouble, sources say. The service provider has raised around $70 million to date, according to data from Venture Economics. However, its last two rounds have included only two investors -- Microsoft Corp. (Nasdaq: MSFT) and Sun Microsystems Inc. (Nasdaq: SUNW) -- and an unconfirmed rumor alleges that Vinod Khosla, a partner at KP, promised each firm that BBO would at least double the amount of its investment (see Vinod Khosla).

Domino's birth will help KP and BBO use many of the network assets that BBO has bought but from which it's failed to wring much revenue. And depending on Domino's ownership structure, which has not yet been revealed, the new company's formation may help KP keep the commercial real estate owners from sharing in the wholesale carrier business.

It's not yet clear how extensive Domino's network will be. Sources say it will likely partner with or buy some capacity from Qwest Communications International Corp. (NYSE:Q). Qwest and BBO share a board member: KP's Khosla, who was also instrumental in securing BBO's investments from Microsoft and Sun.

Domino's network, too, will be made of gear sold by companies backed by KP, such as Juniper Networks Inc. (Nasdaq: JNPR), Redback Networks Inc. (Nasdaq: RBAK), and Corvis Corp. (Nasdaq: CORV), sources say.

But even KP's infamous keiretsu, a portfolio of companies with common and influential investment ties, is not immune to the realities of an unforgiving market. KP has been actively trying to find VCs and others that are willing to invest in Domino at a pre-money valuation of about $150 million, according to one source. (Pre-money refers to the valuation a company receives before it raises its first round of private funding.) That source says that the partners at KP tried to sweeten the deal for investors by promising that BBO would buy $15 million in services from Domino, as soon as the new firm was funded.

Neither Khosla nor representatives of KP could be reached for comment on this story. When reached via e-mail, a BBO spokesman declined to be interviewed, writing that BBO had "no strategy or business plan changes to report." The note continues: "We are continuing to rapidly add new customers and launch service in new buildings. We will be making some important announcements in January that we'll be happy to discuss with you then."

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com

bigbob 12/4/2012 | 9:03:01 PM
re: Kleiner Perkins Builds Backbone Carrier Sound to me as of this has the makings of a great oppurtunity for investors as well as employees of both orginizations. Too many companies today are not willing to take risk. I say Heidi Ho and away we go to a more profitable future. Really makes sense to me.
cfaller 12/4/2012 | 9:02:51 PM
re: Kleiner Perkins Builds Backbone Carrier Actually, it sounds like they're trying to diversify in a last gasp effort to save their BBO investment. All other CLECs are struggling and dying, and BBO is most likely no exception. Expanding in an uncertain market is one strategy to survive, and (provided that the funding won't dry up) it may actually work.
KPSmells 12/4/2012 | 8:56:28 PM
re: Kleiner Perkins Builds Backbone Carrier Also, BBO's main competitior just closed doors. THat's UrbanMedia. UrbanMEdia announced layoffs of all of its employees and closing of doors. So this sounds like KP's last ditch effort to save face, thats all.
jekyll 12/4/2012 | 8:52:41 PM
re: Kleiner Perkins Builds Backbone Carrier Don't put your money into this stuggling company. What type of corporation changes names three times in three months; BroadBand Office, Domino Networks, and now Zephion? Answer, Zephion is in trouble! It will never completely realize its goals, because, even though the company was founded by talented engineer defectors from UUNET, there is no organization of talented management (MBA types) to provide the needed business stucture and stategy to effectively stay afloat. Give them a year at most before they go under or KP has them bought out.
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