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Network Elements Bags $15M

Light Reading
News Analysis
Light Reading
11/20/2003
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One last round of funding hasn't pulverized Network Elements Inc.'s valuation, the CEO claims.

The startup, specializing in 10-Gbit/s transponders, raised $77 million in a 2001 round, gathering investors such as Intel Corp. (Nasdaq: INTC) and Nortel Networks Corp. (NYSE/Toronto: NT). The sequel was a $15 million round announced yesterday, provided by Alloy Ventures, New Enterprise Associates (NEA), and new investor Lake Street Capital (see Nortel, Intel Back Subsystem Startup and Network Elements Gets Partner, Funding).

This money should be enough to carry Network Elements to self-sufficiency, which should occur in the next 12 to 18 months, says CEO Bruce Murdock. The company's valuation dropped with this round but remains "a lot higher than most companies in this space," he claims. "The employees still have a chance to be rewarded."

Network Element has the stats of a bubble-era startup: founded in 1998; with 100 employees; has raised $115 million total. But unlike many of the flameouts, Network Elements chose a market that's viable and not too fanciful (although officials had to shelve early talk of a 40-Gbit/s road map).

Network Elements was smart or lucky on a couple of counts. First, the company decided to build entire transponder modules rather than sell individual components. Most vendors have adopted a similar strategy in the past few years, with JDS Uniphase Corp. in particular trying to move most of its business to a module model. While that presents increased competition for Network Elements, it also makes the startup look more legitimate.

Second, Network Elements lasted long enough to see the 10-Gbit/s market come to life, albeit in small numbers. Most of the telecom volumes are still at OC48, but vendors consider OC192 to be a solid growth market. "When you take into account the price delta between 2.5 Gbit/s and 10 Gbit/s, we see the revenues being comparable," says John Megna, JDSU director of market development for transmission products.

Being a startup, Network Elements isn't going to gain favor with big OEMs unless it cozies up to a larger components vendor or gets acquired. Murdock says the company's not for sale, so instead, Network Elements struck a deal with TriQuint Semiconductor Inc. (Nasdaq: TQNT), also announced yesterday.

TriQuint will manufacture some of Network Elements' modules at a plant in Matamoros, Mexico. Much of TriQuint's optoelectronics manufacturing is moving there, a plan initiated after TriQuint acquired the components business of Agere Systems Inc. (NYSE: AGR.A) (see TriQuint to Acquire Agere's Optics). The companies will also collaborate on future transponders, which will be sold by both companies.

TriQuint isn't the biggest name in optical components, but the deal has a neighborly appeal, as both companies are based in Oregon. TriQuint even sold a team of semiconductor engineers to Network Elements in 2002 (see NEI Buys TriQuint Team). The deal also give Network Elements access to Agere's old optical portfolio and engineering talent -- a plus, considering Network Elements' expertise has been more on the semiconductor side.

For the latest news on 10-Gig transponder developments -- including a look at products from Network Elements, TriQuint, and JDSU -- see Light Reading's new report: 10-GigE Transponders: Update. — Craig Matsumoto, Senior Editor, Light Reading

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