White Rock Mines $42M
Given White Rock's space and the economy, a $42 million fourth round is substantial. During the first nine months of this year, venture capitalists have invested an average of $10.9 million in fourth rounds for telecom and networking equipment companies, making White Rock's latest about four times larger than the industry average. (VCs put a total of $667 million into fourth-round financings of 61 telecom and networking equipment companies, according to the MoneyTree Survey conducted by PricewaterhouseCoopers, Venture Economics, and National Venture Capital Association.)
The company's flagship product, an OC192 Sonet add/drop multiplexer (ADM), has been running live carrier traffic since August, Knott says (see Next-Gen Sonet ). All of the company's product lines are generating revenues, according White Rock's VP of marketing and customer service, Andrew Knott.
White Rock says it is moving product thanks to an original equipment manufacturer (OEM) deal with Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). As part of that deal, Tellabs buys and re-labels White Rock's VLX2010 OC48 (2.5-Mbit/s) and VLX2020 OC192 (10-Gbit/s) Sonet ADMs. The White Rock products are integrated into the Tellabs 7100 dense wavelength-division multiplexing (DWDM) systems and Tellabs manages, markets, sells, and supports the final product (see Tellabs Takes a New Tack).
That means that when Tellabs sells its 7100 boxes, any ADM functionality that comes along with the sale is good news for White Rock. "In the places where we are approved and shipping for the 7100, we are also approved for selling the rest of the solution," says Ron Mackey, Tellabs' director product strategy.
Knott says White Rock is pleased with the Tellabs deal. "They've been able to get us in some major carrier labs," he says.
For smaller equipment vendors such as White Rock, having a larger vendor move its products into larger carriers is quickly becoming the norm. Metro DWDM vendor ADVA AG Optical Networking (Frankfurt: ADV), for instance, sells its products through behemoths such as Siemens Information and Communications Networks Inc. and Hitachi Ltd. (NYSE: HIT; Paris: PHA) (see ADVA Holds Its Own).
The point is that the more sales channels a smaller vendor creates, the more likely VCs will keep supporting the company in tough times, rather than shutting it down and liquidating.
White Rock's existing investors -- Cypress Semiconductor Corp. (NYSE: CY), Fremont Communications, Fremont Ventures, Gulf International Bank, Hook Partners, Investor AB (through its Investor Growth Capital subsidiary), Mayfield Fund, Meritech Capital Partners, Oak Investment Partners, and Pacesetter Capital -- all chipped for the new round. New investor 3i Group plc joins them, and White Rock added 3i's Nelson Stacks to its board of directors. "It certainly makes us feel more comfortable when you have such a good caliber of investors who are all re-upping," says Stacks.
"We evaluate every deal on its own merits and we felt very strong about the management and the technology... you know, the usual things," Stacks says (very convincingly).
Right now it's a tough market for a small company in the telecom equipment world, but (see Andrew Knott) says White Rock is still determined to keep trying. "There have been no substantive merger or acquisition talks," he says. "This funding will take us to cash-flow breakeven... Our plan is to hit cash-flow breakeven by the third or fourth quarter in 2004."
"Only the good companies with good investors are getting funded now," says Knott, as he boards a plane bound for "customer meetings" in the San Francisco Bay area Tuesday morning. "The faint of heart have long since left the market."
That said, Knott acknowledges that the company has to give up more and more of itself to investors as times get tougher. "Like all rounds closing these days, this was effectively a recapitalization." He says employee stock options have been reset to make sure employees are properly rewarded for their work.
"Obviously everything had to be competitive for us to invest," Stacks says, when asked if 3i's stake was a bargain. "I don't think anyone was penalized in the deal, but given the prospects that the company has, I think it was fair to everybody."
In June, the company cut 25 percent of its workforce and has employed around 115 people since (see More Startup Setbacks in Texas). About a year ago, all employees took a 10 percent pay cut in order to help curb expenses, Knott says.
— Phil Harvey, Senior Editor, Light Reading