Native, Xelerated Secure Funding

Maybe it's just post-holiday euphoria, but venture-funding announcements are rolling in like a Fourth of July parade.

The two latest beneficiaries are Native Networks Ltd., which makes access equipment, and Xelerated AB, which makes network processors (see Native Networks Raises $11.5M and Xelerated Raises $12.5M).

Taking an unscientific sample, Light Reading has posted an average of 2.7 venture-funding announcements per week in 2003 (see Funding for Startups). With the Native and Xelerated deals, the past week has seen six such announcements (see Atrica Raises More Cash, Photonics Control Nabs $10M, Ikanos Caps Fourth Round and ZettaCom Lands $19M).

Coincidence? Probably. Sources note that they've heard anecdotal evidence of renewed optimism -- but that these anecdotes aren't much different from those that have fluttered around for the past year or so.

A deeper look at the announcements themselves doesn't reveal any tsumani of funding excitement, either. Intelligent Photonics Control Corp.'s money came mostly from unknowns. ZettaCom Inc. garnered $19.2 million but split that sum among 17 venture firms. Ikanos Communications Inc.'s recent announcement simply tacked an extra name onto a February round of funding.

If there is a surge of confidence, it's recent. Figures from Ernst & Young and VentureOne show that overall U.S. venture funding dipped in the first quarter of 2003, to $3.4 billion, down 21 percent from the previous quarter.

Still, there's evidence of continued interest in follow-on rounds of funding, partly because equity is cheap. With venture funding dropping overall in 2002, most of the attention went to existing companies, particularly in the telecom space (see VC Funding Dips Again). And much of that funding came in "washout" rounds, where a company's previous valuation was essentially wiped out (see Washed Out in the Valley).

Native and Xelerated both had to accept "down" rounds, but executives of both companies say they're still doing better than most other startups over a similar timescale.

"It's definitely a down round, but it's not a devastating round," says Rami Hadar, CEO of Native. Xelerated's CEO Johan Börje likeways says he's "satisfied" with this latest round.

Another reason companies are finding follow-on money is because they've slashed expenses to levels that VCs find acceptable.

"The VCs are looking for a marginal [burn rate] figure of $1 million a month. I don't know where that number came from, but that seems to be what they're looking for," says Paul Liesenberg, vice president of marketing for ZettaCom.

Finally, some startups seriously -- no, really, really -- see glimmers of hope for revenues in 2004.

Xelerated says its $12.5 million funding -- provided by previous investors Atlas Venture, Alta Partners, and Startupfactory -- was justified by an increase in demand for its network processors.

"I think there's been an uptick," Börje says. While this could be taken as a sign of the industry recovering, Börje admits it could also be delayed reaction to Xelerated now having a working product, as of January (see Xelerated Is First to 40-Gig). "It may be that we're being taken as a serious player now."

Xelerated does take a bit of getting used to. The company's technology is based on a pipeline of mini-processors, each of which executes one instruction and forwards the packet down the line. The idea is to guarantee line-rate performance; the tradeoff is having to atomize commands into single-instruction snippets (see Swedes Claim Processor Advance).

"We have a technology that's different. The market is starting to recognize that now," Börje says.

Xelerated's funding announcement included moral support from the former CTO of Foundry Networks Inc. (Nasdaq: FDRY), which has eschewed network processors until now. Earl Ferguson was quoted in the company's press release saying Xelerated's is the first chip that might meet his performance objectives.

Börje notes that Ferguson doesn't stand to gain from making such a statement, as he has no financial interest, direct or indirect, in Xelerated.

Meanwhile, Native is hoping its $11.5 million funding can last until the second half of 2004. A new investor, Israel's Infinity Ventures, led the round, along with existing investor Jerusalem Venture Partners.

Native is "very close" to getting revenue from blades designed for Alcatel SA's (NYSE: ALA; Paris: CGEP:PA) Multiservice Metro Nodes (see Alcatel Takes a Fling at a Ring and Native Secures Its Survival), with commercial shipments starting this quarter, Hadar says.

He adds that Native is negotiating a similar deal in the Sonet market with one of the incumbent Sonet equipment players, and his company is close to shipping its own product, an add/drop mux called the EMX3606.

— Craig Matsumoto, Senior Editor, and Peter Heywood, Founding Editor, Light Reading

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