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