Gigabit Optics Takes in $20M

While publicly traded components companies are still struggling to find the bottom of the downturn, some optical component startups continue to score healthy rounds of funding. Gigabit Optics, an optical subsystem startup, yesterday announced its $20 million second round.

The company is developing optical subassemblies that will be used to build CWDM (coarse wavelength-division multiplexing) transceivers for networking system and subsystem manufacturers. Its products will use singlemode lasers, which will transmit signals over distances between 40 and 100 kilometers.

Gigabit Optics isn’t the only company developing these products. Blaze Network Products Inc., Finisar Corp. (Nasdaq: FNSR), Luminent Inc. (Nasdaq: LMNE), and Tsunami Optics-- also play in this market.

The company has two things going for it, says Naser Partovi, managing director at Enterprise Partners, the lead investor for this round. For one, it has developed a novel way to assemble WDM components to significantly cut costs and produce high yields. Secondly, the transceiver is designed to be no more than one tenth the size of others on the market, reducing power consumption and saving space for the system companies that will eventually use the transceivers in their products.

Unlike the systems market, where $90 million and $100 million rounds of financing are required to get attention, a $20 million round is enough to bring a components startup notice (see Photonex Scores Huge 3rd Round).

"In this environment, any company that can achieve funding without significant dilution is looked at positively,” says Tim Anderson, an analyst with Salomon Smith Barney.

So what about that dilution? Although Gigabit Optics wouldn’t specifically discuss valuation, Partovi says that the company did take funding as a "down round," meaning it was valued lower than it was in a previous round of financing. Down rounds typically mean that existing shareholder stakes are diluted substantially, because the company must give up a larger stake to investors. But Partovi says the round has been structured so that the company can draw some of the money at a higher valuation, after reaching certain milestones. The company also risks getting a lower valuation -- or not getting any money at all -- if the milestones are not met.

This is different from the way many venture capitalists have handled valuation in the past. Usually, a valuation was assigned when the deal was finalized.

“Absolutely, things have changed,” says Partovi. “There was a time when VCs were throwing money at startups. But now we give them milestones and guidelines to meet so that we can limit our risks. It doesn’t make sense to give them everything up front when they don’t have customers or a finished product yet.”

Gigabit Optics plans to use the money it has raised to continue development of its product, which it says will be in samples by the end of the year and in full production by the middle of next year. The company employs only 22 people but intends to raise that total to 35 by the middle of next year. Enterprise Partners took the lead in this round, with existing investors, Ridgewood Capital and Walden International Investment Group, also jumping on board. The company has now raised a total of $26 million.

— Marguerite Reardon, Senior Editor, Light Reading
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