Startups Suffer Setbacks

It's no news that optical startups face an uncertain financial future these days. But last week's terrorist attacks in the U.S. appear to have exacerbated market uncertainty, making it harder than ever for new companies to close much-needed funding. As a result, at least two well-known optical startups made major cuts this week.

Cinta Corp., which is developing an optical switch for long haul use, let go 17 of appromixately 130 employees. Mahi Networks Inc., which is developing a multiservice provisioning platform, laid off about a third of its workforce.

John Vaughn, president and CEO of Cinta says cuts were made across the board including marketing, manufacturing, adminstration and a few in engineering.

Last year, Cinta raised about $64 million from large investors, including ADC Telecommunications Inc. (Nasdaq: ADCT) , Corning Inc. (NYSE: GLW) , Battery Ventures , and Sequoia Capital (see Cinta Aims Big).

Back in July, Cinta announced it hired Bob Cantarutti, former vice president of optical access products at Nortel Networks Corp. (NYSE/Toronto: NT), as its vice president of sales (see Cinta Expands Sales Force). The addition of a sales team and the prospect of beta trials to begin this summer were clearly good signs.

But sources say that it has been difficult to raise a third round of funding -- not a big surprise, given current market conditions, particularly in the long-haul sector. Indeed, as carriers like Qwest Communications International Corp. (NYSE:Q) and WorldCom Inc. (Nasdaq: WCOM) announced reductions in capital spending budgets for 2002, incumbent suppliers like Ciena Corp. (Nasdaq: CIEN), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT) have all reported disappointing quarterly results. Not a promising trend for newcomers like Cinta.

“Long haul transport is a very difficult sell to investors today, given that competition from Ciena, Lucent, and Nortel is very robust,” says Scott Clavenna, director of research at Light Reading and president of PointEast Research LLC. “The outlook for carriers adding new vendors in 2002 is poor.”

But Cinta's CEO Vaughn is optimistic. "We are still in the process of looking for funding," he says. "It's a tough market. It might take a little longer, but we'll get there."

Then there is Mahi. The Sonoma Valley-based startup raised $64.4 million last September, drawing on big-name investors such as Goldman Sachs & Co. (NYSE: GS) and Sequoia Capital as well as carriers WorldCom, Time Warner Inc. (NYSE: TWX), and Williams Communications Group (NYSE: WCG) (see Mahi's Got a Big Fish to Fry).

After its funding round, the company supposedly had a valuation of $259 million. And just two months ago, rumors circulated that Mahi had closed a substantial third round of funding. Word also was that it had signed a $300 million contract with BellSouth Corp. (NYSE: BLS) (see Mahi Secrets Surface).

Now, former employees have reported to Light Reading that approximately 100 of the 325 employees working for the stealthy startup were laid off yesterday and that the optics development program was also eliminated.

The move seems to follow a trend. Lumentis AB , Network Photonics Inc. , and Maple Optical Systems -- companies involved in pursuits similar to Mahi's -- have all decided to scale back development of their optical divisions to conserve cash (see Maple Turns Over a New Leaf and Lumentis Faces Metro Challenge).

“They bit off more than they could chew in the product design and need to trim it back to preserve cash burn,” says Clavenna. “The optics part (tunable lasers, DWDM transport, OADM) was far too ambitious and required too many expensive engineers.“

Lessons learned, perhaps too late. Even prior to last week's terrible events, sources say Cinta and Mahi were suffering the brunt of the downturn. Some says Cinta's layoffs were planned for last week, but company officials decided to postpone the announcement when the tragedy struck.

Mahi and Cinta executives had not returned calls by press time.

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