When the going gets tough, the tough swing handbags.

That appears to be the situation over at Opthos Inc. Lead investor Sprout Group has pulled out of the company, leaving the company and its existing investors in the lurch. Now Opthos executives and the other investors are accusing the Sprout of acting in bad faith.

Meeee-OW!

The end result is that Opthos now appears to be out of funds. Last week it put its 60 employees on furlough until it can get more cash.

"One of the investors decided to change the game plan with little notice to anyone,” says Robert Lundy, CEO and a founder of Opthos. "We are moving day-to-day right now.”

In November the company announced that it had closed a $21.6 million second round of funding led by Sprout Group and Advanced Technology Ventures (see Opthos Gets a Jumpstart). The way the deal was structured, Opthos received $16 million right away and was due to get another $5.6 million in March. But last month the Sprout Group decided to pull out of the deal, and Steve Diamond, a general partner at Sprout, resigned from the Opthos board.

Originally, Opthos had hoped to close this initial round of funding and then raise an additional $30 million, which was to complete the company’s funding until it could become cash-flow positive. But Diamond says that Opthos has been unable to attract new investors, so his firm has decided to pull the plug.

“The company has developed some unique technology,” he says. “But it’s an extremely difficult financing environment, and they’ve been unsuccessful in attracting new investors at this point.”

With the $16 million from November all but gone, Diamond adds that he also doesn’t believe the company has enough near-term customer traction to warrant more investment.

Opthos’s Lundy argues that Diamond is making excuses. He says that his company has completed lab trials with at least one East Coast provider and will enter field trials next month. He expects the company to be generating revenue by June 2002. And, while he admits it's already burned through the $16 million it received in November, he says Opthos only needs about $7 million to last it the rest of the year.

Wes Raffel, partner with ATC, the other lead investor, says that Opthos has met all of its milestones so far and has even exceeded his expectations.

“I don’t understand why they would choose not to continue to invest, when Opthos was meeting all the conditions set out for them,” he says. “Personally, I feel they made the wrong decision -- but they have every right to invest however they want.” [ed. note: even if they have named themselves after the most justifiably despised vegetable in the civilized world.]

Lundy claims that the real reason Sprout decided to pull out of the deal is because Opthos would not agree to merge with another Sprout-funded startup. Lundy refused to name the startup but said that the Sprout group had approached it about merging with one of its East Coast seedlings.

“They were trying to force us to merge with one of their companies back East,” he says. “It doesn’t make sense to me. All of a sudden they decided it would be better to roll us into one company.”

Sprout's Diamond wouldn’t comment on the allegation.

Regardless of the reason for the Sprout Group’s change of heart, the fact remains that the remaining 60 Opthos employees (in November there were 75) will not be receiving their paychecks next week. Right now they are simply vesting and receiving their benefits with no pay. While the company hasn’t missed a payroll yet, it doesn’t expect to pay its employees for at least a month -- or until new cash is brought in.

“We expect to come out of this shortly,” insists Lundy. “This is an intelligent pause as we restructure our investment syndicate. We’ve already seen a lot of interest out there in the investment community.”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com