Wavesmith Scores Financing Coup

Wavesmith Networks Inc. is planning to announce a $12 million round of financing on January 8th that promises to turn other startups green with envy.

That’s because it’s raised the $12 million in the form of subordinated debt. It’s cut venture capital companies out of the loop and borrowed the money it needs to complete prototypes. As a result, it reckons that it’s avoided the perils of having to get a decent valuation at the wrong moment -- in terms of market conditions and in terms of the timing of its own developments.

The bottom line is that Wavesmith has parted with "less than 5 percent" of its equity to raise $12 million -- compared with close to 50 percent of equity for its initial round of $11.5 million, according to Robert Dalias, Wavesmith’s president and CEO.

”You wouldn’t see a deal like this in the current climate,” adds Dalias. The terms of Wavemith’s subordinated debt were resolved way back in September, and it’s taken three months for the lawyers to formalize things with the folk putting up the money -- Comdisco Inc. (NYSE: CDO), GATX Ventures Inc., and Silicon Valley Bank (Nasdaq: SIVB).

The banks “could have pulled out at any moment” during this period, Dalias acknowledges. But they stuck with the deal, even when market conditions worsened, demonstrating their belief in Wavesmith, he notes.

Dalias says that he always planned to raise his second round of finance in this way. “We’re using it to manage our valuation,” he adds. And he thinks Wavesmith’s worth will increase considerably once it’s completed the development of prototypes, which is scheduled for February. By then, Dalias will be looking for a $50 million to $60 million round of equity finance, with a view to closing it in the second quarter of 2001.

Right now, Dalias won’t say much about what Wavesmith is developing, apart from saying that it includes hardware (“You can stub your toe on it.”), and it will sit in carriers' central offices.

Dalias contends it’s the “antithesis” of products from the likes of Tachion Networks, which aim to combine the functions of a telephone switch, ATM switch, router, and all of the other gear found in central offices in a single chassis. Wavesmith’s product will enable carriers to pick the best switches and routers from different vendors. It’ll ride herd over them in some undefined way, providing a way for carriers to focus their efforts on provisioning and managing services for customers.

Dalias comes from Castle Networks, a telephony switch startup that was bought by Unisphere Solutions Inc. (Nasdaq: UNSP). Its first-round backers included a string of heavyweight VCs (see Son of Castle Networks?).

-- Peter Heywood, international editor, Light Reading http://www.lightreading.com

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