Market research

Optical Funding: Down but Not Out

Startups targeting ways to optimize existing bandwidth stand to garner the most support from venture capitalists, according to "Valuation Deflation," the latest report from the Optical Oracle, a subscription-based service from Light Reading.

The report quantifies the fall of private-sector valuations over the past several months, as the market's reacted to a "bubble" of overinvestment and inflated expectations. It also tracks the trends that are emerging as the optical networking market proceeds to the next stage of its evolution.

While valuations are a fraction of what they were a year ago (see Valuation Deflation in Startup Land), there's still investment going on. Companies getting money now are those that promise to leverage the optical facilities so many carriers built out in the first flush of optical Internet expansion. Among the hot spots: IP and MPLS edge routing, which will widen the quantity and quality of the services on existing IP networks.

Top Five Capital Draws Also on the boil are access platforms, especially those targeting optical Ethernet connectivity. Content switches, DWDM systems, and next-generation data switches also offer ways to make the best of fiber already installed.

A few other technologies are warming up, the report says, as revenues increase and demand builds -- a trend many experts see evolving over the next two years or so (see Enjoy the Summer). Included in this category are products for IP service aggregation and fiber and hybrid fiber/coax access.

A couple of once-promising technologies have been relegated to the deep freeze until carriers see the need to expand capacity and start spending on network buildouts once again. In cryogenic mode are long-haul networking, where carriers have cut back heavily in response to a lack of immediate demand. Also under the ice is optical switching gear, for which many service providers don't yet see any revenue advantage over existing facilities.

According to the report, the optical component segment is also no place to look for venture funding right now. "The sector is becoming increasingly commoditized," writes our financial analyst, Christopher Bulkey. "There are too many players in the space." As a result, near-term prospects for funded companies are bleak.

The report, available as part of the new subscription service from Light Reading, www.opticaloracle.com, scrutinizes the valuations of a Heinz-worth of private sector startup companies (57, that is), comparing valuations to actual funding in order to draw conclusions about the present state of the optical networking market and its potential for growth in the next two years.

- Mary Jander, Senior Editor, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
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Scott Raynovich 12/4/2012 | 8:05:22 PM
re: Optical Funding: Down but Not Out That wasn't the idea. The idea is to show which types of networking technology are in favor to get the highest funding from VCs.
Scott Raynovich 12/4/2012 | 8:05:21 PM
re: Optical Funding: Down but Not Out Sounds like you should move to Russia.
researcher 12/4/2012 | 8:05:19 PM
re: Optical Funding: Down but Not Out well...ok...but it sure would be nice to know how this has changed/is changing over time...i guess that's the subject of another report!

fk 12/4/2012 | 8:05:19 PM
re: Optical Funding: Down but Not Out What kind of comment is that, Scott?

So the guy's cynical. So what? Is it really a big surprise in the current market? Besides, he's really not so far off the mark.

There's still dumb money out there. There are still small, growing, well-focused and executing companies out there that are being devalued with the dreamers. I don't see that anyone should "move to Russia" to bemoan this unfortunate state of affairs. YMMV.
fatchance 12/4/2012 | 8:05:18 PM
re: Optical Funding: Down but Not Out I don't get Scott's reply, but truth be known there are some missing pieces to many start-up biz strategies. And yes, Ph.d degrees are not a pass to nirvana but sometimes are a ticket to hubris-land. The "we're so smart they'll have see our genius" product plan is used with VC's and customers alike (similar to the psychic friends marketing plan). Common strategies include making both VC's & customers guess where the product fits into the network. Most vc's have never been in a central office or have spoken to a telcom manager who is trying to figure out how to make a profit with the crap they already bought. There are many bright people with an academic understanding of new technology without the business/marketing/sales detail eperience to put things into context. For vc's they have to look at the shadows on the wall and try to guess what will sell, all the while not really knowing what management skills will be needed to make it happen. If they fund 20 firms they only need 2 to hit big to make it all work. As they say in certain "families" back east, it ain't personal -- just business.
gea 12/4/2012 | 8:05:17 PM
re: Optical Funding: Down but Not Out I agree and disagree with what's been said. I'm a Principal Network Architect with a NJ startup, who left Wall Street when the opportunity came in 1995 to work with EDFAs at Bellcore.

The biggest problem I'm seeing both here and outside my company is that business and tech have a very hard time communicating on a level deep enough to matter. The main reason for this is the fact that most business people realy don't want to have to do their homework (and remember, I worked in the business world for a while). For them, understanding how to verbally push around the names for technology is the same thing as understanding the technology and its uses.

Meanwhile, most engineers are unable to accurately communicate what it is they do, and how it fits into the bigger picture of things (a lot of time, they don't know how it fits into the bigger picture).

In the end, in order for the market to stop being so manic depressive, business people are really going to have to be techies. Sorry, the age of "I'm not good at numbers or technical stuff but I've got a good business sense" are over, at least outside of retail. Techies, meanwhile, will have to build-in thought of utility/sale-ability into what they do. As long as there is a clearly defined boudary between tech and business, it'll always be like this (hot/cold/hot/cold).
ownstock 12/4/2012 | 8:05:17 PM
re: Optical Funding: Down but Not Out What?

That remark flew over my head!

Are you saying that you think Russian investors and analysts know what they are doing better than those on good ol' Sand Hill, CA USA?

Or more likely that you can dish it but can't take it eh?

Poor mislead investors! Poor mislead analysts! Poo poo on those evil entrepeneurs, it's all their fault!

Look, you and I both know the only reason dot coms (and most BPs for that matter) get funded is fundamental greed: put a few cents into a business to reap potential millions...plain and simple. Dot coms had a particularly rich payoff in naive theory.

And I got no problem with Greed. Greed is good: makes the economy run.

But: biz school MBAs with no experience got and still get big money based on a BP they wrote in school. I know, I was there, I saw it happen.

They were and are naive, the first time. The second time they are evil or stupid.

OTOH, professional investors (VCs and IBs) and analysts are paid to know better. They are supposed to have experience and judgement.

As it happens, 99.9% would have ended up better off putting their money into the lottery...it would have paid off better.

I was at an investor conference last week, and watched the investor crowd pack into the "buzz" metro systems and switch plays...

None of which had sales...and each of which required their future telecom customers to re-invent their systems from scratch and even change their fundamental ways of doing business...

Most of which had to develop a key component, qualify it, put it into a box, qualify the box, stack the boxes into a rack, qualify the rack, then make several racks and have a field trial...all on equity funding...or a token contract with a future customer once they got to the rack stage.

In other words, a low probability at best, and even if they are lucky, it will be many, many years before they have a chance of breaking even on monthly cash flow, and many more after that before they show ROIC over a few percent...

Or how about the software plays like...a Java aplet that let's telecom customers configure their bizphone systems...oh, gee, they got a copyright to protect them! Wow, that business is robust!

Only a couple of the presentations were worth any money at all IMO. Maybe 5% of them....the rest were obviously going to fail. In almost all of the cases, there was no proven sustainable market for their product.

But: build a big complex company, the market will appear! After a few years, the forces of nature bring truth to the eyes of all involved.

So all the investors are left with is SPIN ... and the hope that they can spin and flip to a sucker at a profit.

Nothing wrong with that...selling sizzle is American as Apple pie...but when you do it knowing that is ALL there is or most likely ever will be...then that is evil.

Are you suggesting evil is good?

jim_smith 12/4/2012 | 8:05:16 PM
re: Optical Funding: Down but Not Out Lets not confuse things with terms like
all-optical, backbone, aggregation, blah blah.

As I see it, there are two types of switches.

TYPE A. The switch does not have knowledge of
the network topology. The switch cannot setup
a optical connection from one node to another.
Typically the switch can groom lower bitrates
into fatter pipes. The switch consists of
complex h/w and trivial s/w. Also known as a
broadband DXC.

TYPE B. The switch is network topology aware,
hence it can set up a connection from one node
to another. The switch consists of complex h/w
and moderately complex s/w (needs at least one
routing protocol, e.g., PNNI, and one signaling
protocol, e.g., GMPLS). This is what Sycamore,
Tellium, etc. are building.

Now, Ciena's CoreDirector (CD) can be used as a
type A or B switch. I think Ciena wants you to
believe that service providers "transition" from
using the CD as a type A switch to using it as
a type B switch, but my suspicion is that the
service providers are not interested in the type
B capability of CD. If that is the case, then
Sycamore, Tellium, Calient, etc. are in big
trouble. If not, then they have a sound business
jim_baldwin 12/4/2012 | 8:05:14 PM
re: Optical Funding: Down but Not Out Hey I can be cynical with the best of them, but let's not forget that there are startup companies in every space that actually generate value.

Look at Cerent, they were funded, threw around the hype, got aquired and then shipped product that created revenue for Cisco.

I hate to keep looking back at Cerent as the standard, but it comes to mind as a good recent example of why VC's fund companies.
Scott Raynovich 12/4/2012 | 8:05:11 PM
re: Optical Funding: Down but Not Out If you follow this site or my writing (at all), you would find we've done our own very critical analyis of overinvestment, IPO sales shows, unrealistic valuations, investment pyramid schemes, e.t.c.

... but to make the jump from that to say that venture investing is ineffective is pretty extreme (and wrong). Where would technology be in 2001 without venture investing? Without it, wouldn't we be relying exclusively on the technology developments of the IBMs, Lucents, and Xeroxes of the world?

Where would we be then?

Case closed.
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