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