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Optical/IP

Procket Stuffing Its Pocket

Routing young'un Procket Networks Inc. says it has banked more funding. More investment -- and maybe a large customer announcement -- will follow in the coming weeks.

"We had a first close of funds in late 2003 and intend to have a second close in Q1 2004 in the same series," says Roland Acra, Procket's president and CEO, in a statement provided to Light Reading. "We continue to enjoy significant commitment from our existing investors. At the completion of the fundraising we will announce the funding details."

Procket couldn't be pressed for further funding details, but sources close to the company say the amount in the first close was $30 million. The round was led by U.S. Venture Partners, with Redpoint Ventures, and New Enterprise Associates (NEA) also chipping in, one source says.

With the new $30 million in the bank, Procket has raised more than $300 million since its inception. Adding to its cachet, Procket has to be the only routing competitor that is backed by the same VCs that backed Juniper Networks Inc. (Nasdaq: JNPR) and in which Cisco Systems Inc. (Nasdaq: CSCO) still holds a small stake.

Several sources close to the company say that Series D will be a "down round" for Procket, meaning its valuation has fallen since the last round, but the company's valuation didn't get quite the haircut that other startups founded during the bubble have received.

One source, a Procket stakeholder, says the rate of dilution was 25 percent to 30 percent. To oversimplify, that'd make $100 worth of Procket shares worth about $70. It is a dilution, but nowhere near what Procket's peers have seen.

"They diluted all of us without telling us," grumbles one early Procket backer. Other early Procket backers say the valuation cut is a matter of perspective. "Who doesn't feel burned about the money they put to work in 1999 and 2000?" one asks.

In the last few years, wash-out funding rounds in which investors have been soaked have been synonymous with routing startups. Part of the problem was that routing startups received the highest valuations during the height of the bubble. Procket competitors, such as Caspian Networks Inc., were forced to lower their valuations in order to gain more funds to stay afloat (see Washed Out in the Valley and Caspian Starts Fresh With $120M). "This [funding round] wasn't anything close to that," a potential Procket investor says, referring to Caspian's last down round.

It's not a surprise that Procket was able to get more funding. In fact, the company's financial position was one factor that helped convince the current CEO to leave his post at Cisco (see Procket Gets Cisco Exec).

Procket now needs more validation with incumbent carriers -- in the form of either a distribution deal with an incumbent equipment provider or a key customer win in the U.S.

The continued fundraising shows that investors have faith that Procket could still reel in a big deal or two, giving it time to forge better reseller partnerships.

One Procket investor says the company is close to selling gear into AOL. Another says Procket is close to bagging a U.S. customer but wouldn't name the carrier. And, as one might expect, neither Procket nor AOL comment on unannounced deals.

— Phil Procketbacker Harvey, Senior Editor, Light Reading

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snarfulent 12/5/2012 | 2:41:17 AM
re: Procket Stuffing Its Pocket "To oversimplify, that'd make $100 worth of Procket shares worth about $70. It is a dilution, but nowhere near what Procket's peers have seen."

True, but keep in mind that this $70 worth of shares may have originally cost the earlier investor $500, so let's not confuse "30% dilution" with "30% reduction of valuation".

If you raise 30M and incur 30% dilution, that would imply an excellent valuation for the times, but if they've raised $300M overall, then their current valuation is obviously a fraction of what it was in the days of our youthful indiscretions.
Rick.H 12/5/2012 | 2:41:16 AM
re: Procket Stuffing Its Pocket Procket is mainly focused on customers that are very dissatisfied with Cisco and/or Juniper (AOL, MSN, NTT) and Technology enthusiasts (APAC in general). Guess which one should be announced... if any!
reoptic 12/5/2012 | 2:41:11 AM
re: Procket Stuffing Its Pocket These guys are burning through money at breakneck speed. Despite collassal early rounds and more fundraising this fall they are still smoking through over 10M a quarter. Without any customers hard to see this making positive cash flow without additional rounds and current investors washed out and washed up. Even if they get some kind of announcement, that does not a business model make. All the good OEM opportunities have gone elsewhere too. Look out below.
green 12/5/2012 | 2:41:10 AM
re: Procket Stuffing Its Pocket at what valuation did procket raise money ? the last I heard was that they were valued at 1 billion. a 30% down round would mean they are currently valued at 700 million. that is still damn good for a company with a burn rate of 10million/quater and no big customers..
signmeup 12/5/2012 | 2:41:07 AM
re: Procket Stuffing Its Pocket reoptic,

you seem to enjoy being negative. Instead of seeing the bright side, startups getting funding, you have to continually talk smack about procket. That means you are one of two things - a disgruntled employee or an employee of a competitor who is worried.. Which is it? Never mind, I really don't care, and since I am tired of hearing the same old 'never gonna make it, stupid investors, good money after bad, ect.' I think I'll just take advantage of the ignore author button...

Let's see, procket secured another round of funding, got a CEO, and appears to be gaining some traction. All of this points to??? OPTIMISIM!

Given what the industry has been through, we could all use a little optimism. If things do turn around, poor reoptic won't have anything to complain about.
5urf5hop 12/5/2012 | 2:41:05 AM
re: Procket Stuffing Its Pocket > Despite collassal ...
> Even if they get some kind of announcement,
> that does not a business model make.

Four observations about reoptic:

- can't spell
- puts verbs at end of sentences
- likes to poo poo on procket
- always comments about everything

conclusion: must be a product marketing person with too much time on his hands
diag_eng 12/5/2012 | 2:41:01 AM
re: Procket Stuffing Its Pocket Wonder how they got an ~$700M? What are their sales.

Using the CSCO model of a 35 PE, then their revenues (which now is king) should be $20M.

Using the JNPR forward looking PE (~80), then their revenues should be $8.75M.

A 10xSales valuation (pre-bubble) used to be the formula for valuating a startup at Procket's stage. So, in the case Procket would need $70M in sales for $700M valuation and $100M for a $1B valuation. I doubt they've done $20M in revenue in 2003.
snarfulent 12/5/2012 | 2:41:00 AM
re: Procket Stuffing Its Pocket > Wonder how they got an ~$700M?

The two numbers rumor-mongered are $30M and 30% dilution. This doesn't work out to a $700M valuation.

>Using the CSCO model of a 35 PE

PE is a valuation multiple to profits, not revenue.

I'm starting to think the optical bubble was the result of an epidemic of really bad arithmetic.
jstuart_99 12/5/2012 | 2:41:00 AM
re: Procket Stuffing Its Pocket diag_eng:

Two points -
Procket didn't actually start shipping until mid 2003. I know they 'announced' the 8801 in April, but according to the guys at NANOG the 8812 was released as FCS a couple of months later. So it is more likely that they were expected to achieve half of your number, or $10M, correct?

Second, what are the valuations for other startup core router vendors versus sales? I'm not sure that you can draw a correlation between Cisco, Juniper & Procket in terms of valuation, nor can you use a pre-bubble method.

Finally, in talking with a couple of friends close to the VC community, they mentioned that some of the reasons Procket closed this round were product, pricing, and position. The product is out of the development stage and generating revenue. It's price point is attractive to those needing to upgrade. And the momentum Procket is gaining in APAC & Europe makes it well positioned in the US.
the_lord 12/5/2012 | 2:40:59 AM
re: Procket Stuffing Its Pocket Very interesting byline... it certainly demonstrates unbiased reporting...

— Phil Procketbacker Harvey, Senior Editor, Light Reading

Well, the power of the penis mightier than the sword!!!!
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