Kleiner Perkins Scales Back

Kleiner Perkins Caufield & Byers, the blue-chip venture capital firm that has backed big networking winners like Juniper Networks Inc. (Nasdaq: JNPR) and Cerent (later bought by Cisco Systems Inc. [Nasdaq: CSCO] in 1999), looks to be liquidating large portions of its optical portfolio and reorganizing its approach to communications investment.

Earlier this week, Kymata Ltd., an optical component company backed by KPCB, was sold to Alcatel Optronics (Nasdaq: ALAO; Paris: CGO.PA) for $119 million, less than a third of its rumored asking price of $425 million (see Kymata Sold for $119 Million). With investors pouring roughly $162 million into the company over the past two years, the final price likely left KP and other investors losing money (see What's Cooking at Kymata ?).

Kymata isn’t the only KP optical startup that has been forced into an unfavorable exit strategy. Earlier this month, Zaffire Inc., a metro area networks DWDM startup, was sold to another privately held company, Centerpoint Broadband Technologies Inc., in a straight stock swap (see Centerpoint Scoops Up Zaffire). Details of the deal have not been disclosed, but most industry observers agree that selling one private company to another isn’t usually the ideal strategy. Before the acquisition was announced, Zaffire had raised about $100 million in venture funding.

Peter Wagner, a general partner with Accel Partners, which invested in Redback Networks Inc. (Nasdaq: RBAK), Arrowpoint Communications (bought by Cisco) and Tellium Inc. (Nasdaq: TELM), says that VCs are taking a hard look at their portfolio companies and assessing their chances for independence.

"If those chances are slim, as is often the case, if people are being honest with themselves, then a low-priced acquisition or private-private merger might be the lesser of available evils,” he says. “For example, you might think this Kymata deal is a depressingly low price, but compared to chapter 11, it is looking pretty reasonable."

But Kleiner Perkins hasn’t been immune to Chapter 11 bankruptcy filings. Broadband Office, a building local exchange carrier (BLEC) funded by KP, filed for bankruptcy in May and soon after closed its doors (see BBO Files for Bankruptcy Protection and BBO's Bankruptcy and Bounced Checks). Then Zephion, which was spun out of BBO in December as a backbone service provider, folded about a month after BBO (see Zephion: Anatomy of a Debacle). Another service provider investment by KP, 360networks, which had been building a worldwide fiber network, has also recently filed for bankruptcy protection (see 360networks Calls It Quits). In 360networks' case, it's not clear whether KP made or lost money on the deal. The company went public, but public filings with the SEC do not indicate if KP ever held or sold any shares, even though the company is listed as an investment on the KP Website. 360networks officially filed for bankruptcy protection at the end of June and has since been delisted from the Nasdaq (see 360networks Leaves Nasdaq). KP officials did not respond to requests for information about their investment in the company.

Judging from the Kleiner Perkins Website, the firm also looks to be scaling back the marketing of its “communications keiretsu" initiative, a portfolio of companies with common and influential investment ties in the communications sector. The portfolio of companies, which includes public company names like Juniper, ONI Systems Inc. (Nasdaq: ONIS), Corvis Corp. (Nasdaq: CORV), and Redback, as well as the privately held BBO, Kymata, and Zaffire, was one of KP’s larger and more successful portfolios. KP has removed the references to that portfolio from the Website.

The big question now is what will happen to KP’s newer communication investments like OnFiber Communications Inc. and Zepton Networks Inc.. OnFiber is a service provider that has been compared to both BBO and Zephion (see OnFiber: Bottoms Up!). Zepton, likely an optical subsystems play, is still in stealth mode and was founded by the same executives who founded OnFiber (see Zepton: Take Me to Your Leaders).

In general, KP’s apparent retreat from the optical sector is in line with what other VCs are doing. Light Reading has reported previously that VC funding for communications companies dropped 42 percent in Q1 2001 from the same period a year ago (see VCs Turn to Triage).

“We’re definitely seeing a retrenchment in the communications sector from VC firms both large and small,” says Fred Wang, a general partner with Trinity Ventures. “There still is promising growth in this area, but it’s being viewed as overfunded right now. A lot of VCs are being cautious and aren’t making any new investments there until things start to turn around.”

Officials from Kleiner Perkins declined requests from Light Reading for an interview.

- Marguerite Reardon, Senior Editor, Light Reading

redface 12/4/2012 | 8:00:25 PM
re: Kleiner Perkins Scales Back How come no one mentions these two KP backed component startups in this report? Iolon seems to be struggling with its much-hyped technology and not going very far.
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