Reality Bites at NGN Conference
Nowhere is that new, bleak realism more evident than at the Next-Generation Network Ventures conference that opened here today. NGN participants are currently fighting hard to define the parameters of optical technology -- while watching funding dry up as potential customers and investors keep their wallets closed (see Money Crunch Pressures Startups).
Surviving the slowdown was the mantra of Tuesday morning's discussions at the show in Burlingame, Calif. Host John McQuillan, chairman of the conference and president of McQuillan Ventures, tried to kickoff things with a positive spin, saying: "A downturn favors upstarts." But nobody at the conference could ignore the current slowdown affecting the entire telecom-focused industry, a trend highlighted by Monday's now-recurrent earnings warning from bellwether Cisco Systems Inc. (Nasdaq: CSCO) (see Cisco's Inventory Woes Mount).
Only a year ago, McQuillan's analysis of the networking startup industry was that selling your startup for $100 millon was a worst-case scenario. But in 2001, he sunnily notes, "Going out of business has returned as an option."
As service providers and other large customers buy less equipment, the trickle-down effect has hit component suppliers the hardest. Many are now scrambling for ways to stay alive.
"The trickle-down for these guys [component vendors] is quite severe," McQuillan says.
Bob Lucky, corporate vice president for applied research at Telcordia Technologies Inc., reflected a general consensus with his belief that many service providers are going to "drag their feet" on building new networks, at least for the next year or so.
"The question is: Will [component vendors] continue to be funded?" Lucky asks.
Meanwhile, optical component vendors are positioning their wares as technology that will drive the systems needed a couple years in the future. According to one venture capitalist, that kind of thinking will be needed to attract investors.
"If Cisco can tell you now that they need it, it's too late for me to make money," says Andy Rappaport, partner with Menlo Park-based August Capital. "So if Cisco has two bad quarters now, I don't care. The question is: Are you working on something that's going to be fundamental, 10 years out? The answer is, for most of the startups, that we don't know yet."
Part of the problem is the infancy of optical components technology, which Rappaport compares to the electronics of the 1940s. "Components producers are still at the stage where they don't know whether to put the pins on the bottom or the side of the vacuum tube," he says. "But it takes time to figure these things out."
Some big bets are being placed on companies basing their products on indium phosphide, which proponents say allows for the production of cheaper, smaller, and faster laser technologies. Another technology that seems to be winning greater acceptance is the VCSEL (vertical cavity surface-emitting laser), which promises greater design flexibility and simpler, less costly production.
During NGN's opening panel presentation, startups Genoa Corp., CyOptics Inc., Bandwidth9 Inc., and Agility Communications Inc. all touted their wares as products that could enable system producers to realize radical pricing and performance shifts beyond current technologies. The startups' main concern right now, however, is surviving long enough to see their predictions materialize.
Larry Coldren, chairman and CTO of Agility, said his company had originally planned to have an IPO right about now, but instead is seeking more venture funding.
"And it's nasty, with the kinds of terms people are asking for," Coldren says, carefully looking around to see who might be listening in during a coffee-break discussion. "But we're not sweating, or at least we're not letting them see us sweat."
Agility, which is building tunable lasers, transceivers, and other dense wavelength-division multiplexing (DWDM) system components, needs to get design wins for "next-generation systems, ones that will be for sale two years from now," Coldren says. "But that doesn't mean we can stop building our fab plant. The systems guys are banging on us harder than ever, telling us not to get out of phase." (See Agility Unveils Long-Haul Laser.)
Rick Gold, president and CEO of optical-amplifier developer Genoa, says he's breathing a bit easier, since his company has almost $100 million in funding (see Genoa Announces Product, Funding). But he feels that more, not less, innovation is going to be required from component vendors.
"There's no doubt that deployment [timelines] of the next-generation networks have been driven out some," Gold says.
Several speakers said the current shakeout is a good thing for the industry, since the fund-anything-optical trend of the past couple years produced more companies than the marketplace could sustain.
"I was at the OFC show, walking around looking at all the booths, wondering how all those people were going to make money," Telcordia's Lucky says (see OFC Report) .
"The funding of the last couple years has led to a stunting of figuring out how systems should be built," August Capital's Rappaport says. "A downturn in the industry could be the best thing that could happen to optical innovation."
But beauty, of course, is always in the eye of the beholder.
"It's easy to say a shakeout's good," Genoa's Gold notes. "But it all depends on whether you're the shaker, or the shakee."
-- Paul Kapustka, Editor at Large, Light Reading http://www.lightreading.com