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Optical/IP

Photonex Scores Huge 3rd Round

PhotonEx Corp. just announced this afternoon that it has closed a $90 million round of financing to complete development of its 40 Gbit/s long haul DWDM system.

This third round of funding brings the total amount raised to $178 million. The company, which now has 190 employees, announced an $80 million second round last November (see Photonex Has a 40-Gbit/s Idea). 3i Group PLC led the round. Axxon Capital LP, Boston Millennia Partners, Castile Ventures and JP Morgan Direct Venture were all new investors in this round. All previous investors, including Matrix Partners , North Bridge Venture Partners , Oak Investment Partners, Essex Investment Management Co. LLC, Silicon Valley Ventures, Intel Capital and The Photonics Fund, also participated in the round.

A $90 million round for an optical transport startup even a year ago, when the market was flying high, would have raised eyebrows. Nowadays, as the U.S. economy faces a recession and startups struggle to raise cash, a $90 million round turns heads. Factor in that Photonex is focused on the unfashionable long haul market, and it’s enough to send eyeballs popping out their sockets.

"I think the fact that they were able to raise this kind of money in today’s market in a segment that has been disproportionately hit by the downturn, signifies that there is something there," says Rick Schafer, an analyst with CIBC World Markets.

Photonex is aiming for a market that has been particularly hard-hit by the recent downturn. A perceived capacity glut and reduction in capital spending by carriers has all but shut down funding for most long haul startups and has sent stock of public companies dependent on this market into a downward spiral. Younger public companies like Sycamore Networks Inc. (Nasdaq: SCMR) and Corvis Corp. (Nasdaq: CORV), which were both poster children for the optical boom last year, have seen their stocks slip well below cash value.

So what is so special about Photonex? Unlike Sycamore and Corvis, Photonex represents the next generation of long haul transport.

"The long haul market is going to come back," says Schafer. "The slow down has bought next generation startups some time for their market to develop. If they can dodge the bullets and keep their noses to the grindstone, theoretically the market should be there when they introduce products."

There are also rumors that Qwest Communications International Corp. (NYSE: Q) has been looking into the product and has been pumping it up among investors. Although no contract has been signed, word of mouth support from at least one blue chip carrier has proven to be helpful for Photonex, say sources close to the company.

"This round involved much more thorough diligence," says Kristin Rauschenbach, CEO, president and co-founder a Photonex. "Investors demanded a lot of interaction with our customer base."

Aside from bigger players like Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Nortel Networks Corp. (NYSE/Toronto: NT) and Lucent Technologies Inc. (NYSE: LU), which are also developing 40 Gbit/s transport gear, there are several startups focused in this area (see 40-Gig Forecast).

Already investors are parsing out the winners from the losers. Canadian-based, Solinet Systems Inc. recently announced a $93 million second round (see Solinet Systems Scores $93 Million), and Innovance Networks, which scored $75 million last year from top name investors including former JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) CEO Kevin Kalkhoven, is rumored to be working on another big round (see Innovance Scores $75M ).

At the same time other startups working on long haul transport like OptiMight Communications Inc. are having a hard time raising cash, (see Wu-Fu Chen Startups Hit the Skids). Others, like Latus Lightworks Inc., have gone out of business altogether (see Lights Dim at Latus).

What seems to be separating the winners from the losers is technology. Rauschenbach, Photonex’s CEO, says that her company has a leg-up since it is using 10 Gbit/s parts to develop a 40 Gbit/s system. This strategy allows the company to build an affordable product much faster than its competitors, she claims.

"Using commercially available parts translates into real carrier savings," she says. "We have a lead on this market, because we are leveraging parts we can already get from JDSU and Corning, giving us a larger supplier base. We don’t have to wait around and ride the components curve as 40 Gbit/s parts develop. So we can get to market faster and more inexpensively than competitors."

Photonex isn't alone in using commercial 10 Gbit/s parts to make 40 Gbit/s systems. Another startup, Teradvance Communications, Inc., is developing similar technology, using a single laser for four 10 Gbit/s channels (see Teradvance: A New Take on 40 Gig).

There are also downsides to this strategy. For one, optical purists argue that the Photonex approach essentially lumps four concatenated 10 Gbit/s streams together to achieve 40 Gbit/s rates. What’s more, some analysts say that 40 Gbit/s transport won’t likely take off until at least 2003. Over the next year, the real sweet spot is in 10 Gbit/s transport, a market that Photonex doesn’t plan to address. This is worth noting considering that Solinet is planning to release a 10 Gbit/s version of its product first, while it continues to develop the 40 Gbit/s technology.

Photonex plans to have its product ready for general availability by the end of the year.

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

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dtj4000 12/4/2012 | 7:43:08 PM
re: Photonex Scores Huge 3rd Round Seems like the lead on this round was 3i. Didn't see them listed unless there's an alias. What's up with that?

And wasn't there chat about 3i being the angel and more for Ilitron (the UK based ULH attempt that sold to Altima for pocket change)?
flanker 12/4/2012 | 7:43:08 PM
re: Photonex Scores Huge 3rd Round "There are also rumors that Qwest Communications has been looking into the product and has been pumping it up among investors."

Yes, and my name is Marilyn Monroe.

Just because some crack smoking engineer in the basement of HQ is tinkering with the product doesn't mean an order is imminent.

No carrier in their right mind is talking about replacing 12 month old LH equipment with this stuff. I guess no one told the VC's.


nbwaite 12/4/2012 | 7:43:04 PM
re: Photonex Scores Huge 3rd Round "A $90 million round for an optical transport
startup even a year ago, when the market was flying
high, would have raised eyebrows. Nowadays, as the
U.S. economy faces a recession and startups struggle
to raise cash, a $90 million round turns heads.
Factor in that Photonex is focused on the
unfashionable long haul market, and it's enough to
send eyeballs popping out their sockets."

Nonsense, total nonsense. Again, the media is
showing how little it understands, how superficial
its view is. Again, LR has only two basic stories,
(1) the market is going up, up, up and (2) the
market is going down, down, down. Now that you have
some evidence of something not going along with your
current down, down, down, you want to pop eyeballs
out of sockets. Nonsense.

Reality is more complicated. Instead of "eyeballs
popping out their sockets," might just reconsider
with something higher up than just your gut, e.g.,
somewhere between your ears. And, might use methods
more recent than your favorite, Shakespeare.

So, to see where things are going, you need to (1)
formulate some good questions and (2) address them
with some good quantitative data.

Doing this, you will see that digital
communications, in the world, over the next few
years, has a VERY long way to go. Instead of your
"glut", capacity will be needed by factors of ten
more than we have in place now.

Why? Consider just one application: High quality
digital motion video for conversations and
conferencing. Add various 'distributed'
applications. Don't believe me? Okay, look at our
national economic and technological policy as being
pushed by the NSF, etc.

Sure, $90 M is a lot of money, but it is good to see
that some VCs are taking the future seriously.

So should LR.

But, it won't be just all up or all down; instead,
it will be complicated and will need careful
thinking, data, and analysis at each step.
flanker 12/4/2012 | 7:43:02 PM
re: Photonex Scores Huge 3rd Round ""Nonsense, total nonsense. Again, the media is
showing how little it understands, how superficial
its view is.""

That's lot of hooey. You need a business model, and there isn't one for STM 256.
fhe 12/4/2012 | 7:43:00 PM
re: Photonex Scores Huge 3rd Round "Ask the industry leaders in ULH - ask their sales guys if they had such a product today, could they sell it - answer is no! Ask them if they had the product next year could they sell it- answer is no!"

Of course they CANNOT sell if they DO NOT have the product! Doesn't matter WHEN it is... God!

Have you ever heard, "If you build it, they will come..."??? I can totally see you as one of those guys still using a 486 at home, with a 9600 dial-up modem, and say you don't see a need for higher power/bandwidth. Sad.

_____ 12/4/2012 | 7:43:00 PM
re: Photonex Scores Huge 3rd Round nbwaite: You are obviously an employee of Photonex.

"The company, which now has 190 employees, announced an $80 million second round last November" So it looks like they will need another 100mil this time next year.

"So, to see where things are going, you need to (1)formulate some good questions and (2) address them with some good quantitative data." Ok, Ok, How's this: (1) With No demand until 2003, maybe 2004, what is the value proposition? (2) Good data, how's this: nothing from nothing = nothing.

Back in the 1940's and 1950's the government funded science projects and made "infomercials" about flying cars and robots who would serve you dinner and clean your carpet for you. Millions of $$ were spent yet the idea's never came to fruition. Photonex is nothing more than a heavily funded science project. I am not saying the company is worthless but with no value proposition, it begs to open up a can of worms.

Ask the industry leaders in ULH - ask their sales guys if they had such a product today, could they sell it - answer is no! Ask them if they had the product next year could they sell it- answer is no!

But then again there are a few people with mohawks in my neighborhood who would love to play with something like this... if you know what I mean.



flanker 12/4/2012 | 7:42:59 PM
re: Photonex Scores Huge 3rd Round ""Of course they CANNOT sell if they DO NOT have the product! Doesn't matter WHEN it is... God!
Have you ever heard, "If you build it, they will come..."??? ""

It's tough enough selling 10G equipment at the current bargain basement pricing. Can you imagine trying to sell 40G at perhaps 2x the 10G price point?

Haven't you heard - there are vendors selling enterprise WDM transport at base prices of $25,000. Yes, that's right. $25k. Of course, that's without the cards and its a short reach solution, but 40G - hah!









_____ 12/4/2012 | 7:42:59 PM
re: Photonex Scores Huge 3rd Round FHE- When did they come out with a 9600 dial up- gotta get me one of those new models...

"If you build it, they will come...." What kind of a business model/value propositions is that? What the heck are you smoking???

The point I was trying to make, and I am not trying to bash Photonex, is that there is not demand for this product and there will not be for a long time to come.

And Photonex will require several additional rounds of funding to keep going. When it is all said and done, the company will be worth something. but when you factor in several rounds of funding with dilution, it becomes a wash.

I think the CEO/CTO from Photonex are very smart people. But being technically smart does not mean you know what you are doing business wise. I don't think the founders have really ever sold product in the market place- if they had the right person at the helm they may be able to do something with the technology.

Just my 2 cents-
laserkid 12/4/2012 | 7:42:55 PM
re: Photonex Scores Huge 3rd Round
Do some research before posting next time... look up III on the London stock exchange...
aaaaaaptics 12/4/2012 | 7:42:53 PM
re: Photonex Scores Huge 3rd Round yes, i know the market isn't there yet but CORV is. what's everyone's take on CORV's ULH product suite.
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