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Funding for startups

Is Ellacoya on the Comeback Trail?

After much criticism and a strategy overhaul, Ellacoya Networks Inc. might be on the comeback trail. The company has closed a fourth round of funding worth $14 million, and investors say its lineup of new customers sealed the deal (see Ellacoya Secures $14M).

“We wouldn’t have invested if they didn’t have good customer traction,” says Michael Feinstein, senior principal at Atlas Venture, which, along with Flagship Ventures, led the round. “We were definitely looking to see if they have the ability to close customer deals, and they do.”

In the past six months, Ellacoya has signed up 13 paying customers. Most of its customer base consists of utility providers that are offering broadband services to customers. While these providers are not necessarily the biggest names, they are generally financially stable. They include EastLink Cable Systems, Millennium Digital Media, Cedar Falls Utilities, Coldwater Board of Public Utilities, and Muscatine Power & Water.

CEO Ron Sege says the company is also in trials with another 15 service providers, including cable operators, fixed wireless providers, and at least two Tier 1 ISPs that he's unwilling to identify right now.

Besides Atlas Venture and Flagship, which are new investors, existing investors, including Bessemer Venture Partners, Goldman Sachs & Co., and Lightspeed Venture Partners, also participated in the round. (Disclosure: Lightspeed is also an investor in Light Reading.)

The story of Ellacoya is similar to many "bubble and bust" tales in the telecom startup segment. The company first began targeting the competitive local exchange carriers (CLECs) with a product that helped carriers provision and deploy new services. It raised $111 million in three rounds of funding. Rumors floated around at the end of 2000 that Goldman Sachs was poised to take the company public (see Ellacoya Gets a Blue-Chip Backer and Ellacoya Snags Third Round). Most of the cash raised in the previous rounds was used to support the company’s growing headcount, which ballooned to over 220 staffers.

But when the bubble burst, so did the company’s prospects and valuation. It had a series of layoffs that have chopped its headcount down to about 56 employees (see Boston Area Startups Slash Jobs and Ellacoya Cuts Staff -- Again). Last January it started working on a new product targeted at the cable and ISP market (see Startup Renaissance in Cable Market).

The company has designed and developed an entirely new product based on its original technology. The 16000 Series Switch started shipping last summer. Essentially, it monitors cable network traffic and lets operators know which groups are using what applications at what times. It’s specifically designed to help providers control peer-to–peer applications on their networks, so that one set of apps and users doesn't starve others.

Sege concedes that the potential market for its new device is much smaller than what had been anticipated for its CLEC-targeted product. Although he wouldn't give details, he also admits the company's valuation is only a fraction of what it was at its height in 2000. But he says the company has started over in order to survive.

"We've basically taken some of the core technology and built a new company around it," he says. "The money we had in the beginning is gone, but I think with this new strategy, investors will still see a good return."

The strategy seems to be working so far. Ellacoya execs are looking ahead optimistically, thanks to the latest round, which will be used to commercialize and manufacture the new product.

But challenges lie ahead. Ellacoya's successfully reworked its product line and strategy so far, but money will be tight for the foreseeable future. Sege says, for instance, he doesn’t anticipate adding more bodies to the company’s headcount anytime soon. Instead, Ellacoya will stay the size it is for the foreseeable future, despite the enlarged customer roster and imminent rollouts.

“I’ve promised the investors that I would spend this money very, very carefully,” says Sege, who looks to reach profitability by early 2004.

— Marguerite Reardon, Senior Editor, Light Reading
stuartb 12/5/2012 | 12:52:51 AM
re: Is Ellacoya on the Comeback Trail? Wow, you guys should make them the #1 private company again. Right up there with Tropic, who just "won an RFP"... LoL
photon_mon 12/5/2012 | 12:52:44 AM
re: Is Ellacoya on the Comeback Trail? Nothing against Ellacoya. Any "non-negative" news
is potentially good news - unless it's more
tiresome propaganda that is unfortunately so
typical of our industry.

But I must have just fallen off of the turnip truck.
Not sure what "commercializing the product" means.
Interesting term. Has anyone heard of it? Or is it
a new buzzword for the new year? Is it like
"martinizing"?

And I'm sincerely curious: has the term "paying
customer" changed from recent halcyon years? Or
does it actually now mean what it implies?

I DO get Ellacoya's survival strategy, and it does
impress that they were able to raise more cash at
this point. Brownie points awarded as well for
Sege's admitting that previous cash was exhausted
(we knew it, but hey, it's still nice to hear it).

Forgive me for being cynical. I'd love to find
trustworthy evidence of a true trend-reversal.
And I hope Ellacoya - as a part of it - does turn
things around, and helps contribute to near-
future job creation / regeneration.

This article simply just raised a few "BS alert"
flags for me. And I was hoping that the companies
still breathing had at least learned to be
factual in their press releases, and not try to
play us for the dopes that we are.

Just be careful, gang, $14M doesn't go as far as
it used to. Don't know how much "commercializing"
will cost, but I know that manufacturing is indeed
essential - so that for sure will demand a piece
of the budget.
SaberJB 12/5/2012 | 12:52:37 AM
re: Is Ellacoya on the Comeback Trail? Good post, but actually, with all the cost cutting and penny pinching, $14 million can go a lot farther than it used to.
photon_mon 12/5/2012 | 12:51:54 AM
re: Is Ellacoya on the Comeback Trail? Thanks for the pat, SaberJB.

Not fishing, but I am wondering
if you're an Ellacoya insider.
Don't respond if you are, or if
you are uncomfortable with my
curiousity. I'll understand. See,
I was a part of the "cost cutting".


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