WaveSmith Closes $31M Round

WaveSmith Networks Inc. is planning to announce a $31 million round of financing next Monday -- demonstrating that there's still some venture capital to be had in optical networking.

WaveSmith’s new round is notable on a couple of counts. First, it’s led by a new investor, Fidelity Ventures, unlike some other recently announced rounds, where the old investors have been obliged to stump up some extra cash to avoid a disaster. Second, the company claims this is an “up round," in which its valuation was set at a higher level than in previous rounds. As a result, it’s avoided the perils of a “down round” -- commonplace, lately, for startups in the optical market.

So, what’s WaveSmith’s secret of success?

It comes down to having the right product at the right time, meeting target dates, and paying careful attention to corporate finance, according to Robert Dalias, WaveSmith’s president and CEO.

WaveSmith got started by identifying a big potential market for its product -- switches that enable incumbent local exchange carriers (ILECs) to boost the capacity of their existing ATM (asynchronous transfer mode) networks, while providing a migration path towards the next likely technology for guaranteeing quality of service (see Multiprotocol Label Switching (MPLS)).

As things have worked out, WaveSmith could hardly have chosen a better target market, because the ILECs are still around with loads of money to spend. In contrast, many of the competitive local exchange carriers (CLECs) targeted by other startups have drawn in their horns on spending or gone bust.

Even better, the big equipment vendors appear to have left something of a void in the ATM market for WaveSmith to fill. The likes of Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), and Marconi Communications PLC (Nasdaq/London: MONI) have concentrated on building monster multiservice switches to replace their existing ATM switches, expecting their older kit to be redeployed at the edge of networks. This isn't happening, mainly because older ATM switches can’t handle the huge numbers of virtual connections generated by DSL (digital subscriber lines) -- unlike WaveSmith’s switch (see WaveSmith Too Good to Be True?).

Of course, WaveSmith hasn’t got this market all to itself. Other startups, like Gotham Networks, have similar products. And plenty of people pooh-pooh the whole concept of multiservice switches, saying that edge routers from the likes of Laurel Networks and Unisphere Networks Inc. (Nasdaq: UNSP) offer a better alternative.

The big vendors also aren’t going to give up such a huge market without a fight -- and they’ll probably do their best to persuade ILECs that it’s risky buying equipment from startups like WaveSmith and Gotham.

Still, WaveSmith claims a number of heavyweight carriers are testing its equipment, or have agreed to test it, with a view to placing orders. They include Cable and Wireless (NYSE: CWP), Comcast Corp. (Nasdaq: CMCSA, CMCSK), Genuity Inc. (Nasdaq: GENU), and Verizon Communications Inc. (NYSE: VZ).

Earlier this year, Dalias told Light Reading that he'd had to give away “close to 50 percent” of WaveSmith's equity to secure the $11.5 million first round of funding from Atlas Venture, Bessemer Venture Partners, and Commonwealth Capital Ventures. But he avoided giving away another big chunk of equity last December by raising a further $12 million in the form of subordinated debt (see Wavesmith Scores Financing Coup).

The first round gave WaveSmith a post-money valuation of $25 million, according to Dalias. He declines to give the valuation used in the latest round, to be announced on Monday, but says it’s “multiples higher.” Up rounds like this keep staff happy. Conversely, down rounds often dilute employee stock options, which sometimes encourages key staff to quit.

Mind you, the company says it had a tough time negotiating its latest round. Quite a few VCs wouldn't even listen to WaveSmith when it started looking for more money last March. “A lot of the VC market has forgotten that the 'V' stands for 'venture',” Dalias complains.

Wavesmith ended up presenting to eight VCs, four of whom proceeded to the next stage of negotiations, and this led to Fidelity taking the lead. The latest round of financing is “sufficient to get us well past first customer shipments, months and months afterwards,” says Dalias. “We have a long road ahead of us, and there’s lot of potholes." First customer shipments are scheduled for the end of the year.

— Peter Heywood, Founding Editor, Light Reading
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_____ 12/4/2012 | 8:12:24 PM
re: WaveSmith Closes $31M Round I guess 1.0000001 technically is a multiple :)
Does this mean they have to pay back the 11.5mil they received in December which would net them only 20mil on this round?

But good for them for raising the money- A lot of start up's would like to be in their shoes right now.
deadbeef 12/4/2012 | 8:12:23 PM
re: WaveSmith Closes $31M Round Can anyone provide a factual comparison of the switches that these two companies are building?

-protocols supported
-capacity per rack or switch
-release dates
-plusses and minuses
kupfi 12/4/2012 | 8:12:20 PM
re: WaveSmith Closes $31M Round Just compare the products section on both companies web sites. Gotham has real products while WaveSmith is little behind.

Which is understandable since Gotham started earlier.
lu-alum 12/4/2012 | 8:12:19 PM
re: WaveSmith Closes $31M Round Funny thing is Gotham announced product last october and have yet to name a customer, trial or 3rd round of funding. WSN on the other hand has announced customer trials with good names, and is being funded in a down market.

Not that I'm a WSN cheerleader, I won't believe them till they have revenue (it's all marketing until someone signs a check) but as my name suggest, I'm ex-LU and I was burned by the nexabit stuff. Well Gotham and Nexabit have the same architect, so I'm skeptical and obviously biased.
ru4real 12/4/2012 | 8:12:19 PM
re: WaveSmith Closes $31M Round Gotham has real product??? So, do you have
any idea who is buying this real product?
myresearch 12/4/2012 | 8:12:17 PM
re: WaveSmith Closes $31M Round Wake up, we are in a different market!

Already having a product now is *bad* in this
climate. Nobody is buying any stuff right now.
A product ready and a lot of people
will kill you. How do you explain to the VC
that you have a product done but no sales in
6 months?

Time-to-market means Timed your product to
the right stock market:-)

theraptor 12/4/2012 | 8:12:16 PM
re: WaveSmith Closes $31M Round Gotham seems to be floundering like a few others in the edge market. No customer announcements, just fluff press releases.
skarz 12/4/2012 | 8:12:14 PM
re: WaveSmith Closes $31M Round this has to be one of the most anal comments i've seen on this msg board.

i can only surmise you're kidding.
optomatic 12/4/2012 | 8:12:13 PM
re: WaveSmith Closes $31M Round Already having a product now is *bad* in this climate.

Only a fool or someone who is unable to make his product work would say such a thing; it's that absurd. A working product that is what the ILECs want to buy is certainly not a bad thing. I've gotta say, of all the weak attempts at spin I've seen, that has to rank among the most flaccid.
deadbeef 12/4/2012 | 8:12:13 PM
re: WaveSmith Closes $31M Round Where have Gotham's developers come from? What ATM expertise do they have? It seems that WaveSmith has alot of the same people that built the Cascade switches 6 years ago.
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