No Go for Yafo?

Layoffs and lack of customer demand dog 40-Gbit/s startup

December 24, 2001

3 Min Read
No Go for Yafo?

The holiday cheer is likely to be thin on the ground at Yafo Networks this year.

According to Light Reading sources, the startup, which is working on 40-Gbit/s technology, recently laid off half its staff, failed in its attempts to win further funding, and has seen a major customer contract slashed back to a nubbin.

What a difference a year makes. Twelve months ago, 40-Gbit/s kit promised to be one of the hottest technologies going. But then the optical networking bubble burst. Carriers began thinking more about how to make money from existing infrastructure and less about building more network capacity -- and 40-Gbit/s got sidelined.

Yafo Networks is now feeling the effect of that shift in priorities, sources say. The company, which was founded in 1999, is building a turnkey solution to tackle the problem of polarization mode dispersion (PMD) on ultra high-speed networks (see Can Yafo Lift Speed Limits?).

“The problem is their market,” says Doug Green, vice president of marketing for Ocular Networks Inc., a startup that was recently acquired by Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). “PMD is a problem that is an annoyance in current networks, but promises to be a real big issue with 40G systems. Henry [Yaffe] and Frank [Moody] saw this as an opportunity as everyone was hyping the fact that 40G was ‘right around the corner.’ However, nobody plans on deploying 40G any time soon -- hence, no market for their product.”

Yaffe, one of the founders of Yafo and CTO of the company, admitted back in July during a panel discussion at NFOEC that the uptake to 40 Gbit/s would take longer than he and others in the industry had expected (see 40 Gbit/s Takes the Slow Lane).

Last month, the company quietly laid off a large portion of its staff. The exact number is still under wraps, but some former employees who contacted Light Reading say that it was close to 50 percent of the 100 person staff. Jeff Ferry, spokesman for the startup, would not comment on the number of employees that were let go, but he said that cuts were made across the board.

“Like other startups that have been through this, we cut the usual amount,” says Ferry. “We had to make these cuts because the industry as a whole is so depressed, but we are totally convinced that there is a strong market for PMD compensation. And in a year, you’ll see how right I am.”

A recently laid-off employee, who requested anonymity, says Yafo also suffered when WorldCom Inc. (Nasdaq: WCOM) decided in October to pare back an order for 1,000 Yafo-10s, Yafo's first product, to fifty units over the course of 2002.

Ferry denies that the company has had difficulties finding customers interested in the technology. “We are seeing some encouraging signs of renewed growth in our market,” he says.

Meantime, word from the venture capital circuit is that the company is struggling to raise a third round of funding. In two previous rounds, the company had raised a total of $40 million. But it hasn’t had a round since April of 2000, and some say it is in desperate need of cash.

“They came through here looking for cash some time ago,” says one venture capitalist, who didn’t want his name used. “Good guys, but there was the obvious market problem.”

Yafo isn’t the only company focused on this market. Phaethon Communications and General Photonics Inc. are developing similar products. Phaethon has raised about $30 million in funding. General Photonics is still in the early stages of development. Back in June it raised $5 million, but its CTO says that it's already generating revenue (see General Photonics Is in the Money ).

— Marguerite Reardon, Senior Editor, Light Reading

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