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Funding for startups

Optical VCs Grow Wary

Venture capital firms still plan on investing plenty of money in the optical networking sector this year. But the VCs are likely to get choosier about the companies they back.

"We're still investing in optical networking companies, but we're being very selective," says Peter Wagner, general partner at Accel Partners. "As the marginal entrants get washed out, you'll probably see an aggregate reduction of 50 to 70 percent in overall funding -- compared to last year's very frothy peak."

According to VentureWire Group, which publishes an online newsletter about VCs, venture capital firms sank a total of about $3.7 billion into optical networking companies in 2000 ($2.6 billion on equipment companies, and $1.1 billion on component startups). That's nearly a tenfold increase over spending in the segment in 1999. But the jury's still out on what the growth will be in 2001.

"Overall, venture funding will decrease, we think, from about $100 billion total worldwide to about $80 billion. But we don't have any specific projections for what will happen in the optical segment," says Kenneth M. Andersen III, managing editor at VentureWire Group.

Some sources say VC reticence is part of a natural market progression. "We're in the midst of a development cycle," says Kirk Walden, national director of venture capital research at PricewaterhouseCoopers. "As an industry comes into its own, it becomes more segmented. Right now, there are already a lot of bases covered in [optical networking]. You'll start to see some slowing down. Restrictions are getting tighter. It's not sufficient just to show revenues. Investors want to see a clear, credible path to profitability."

What changed? The stock market. The performance of the leading public companies in the stock market influences all of the financial activity in the sector, including mergers and acquisitions and IPOs.

"Tough times on the stock markets toward the second half of last year really made the funders, the equity and bond markets all much more careful about who they fund this year," says Scott Clavenna, president of PointEast Research LLC and director of research for Light Reading. (For Clavenna's itemized predictions, see Top 10 Trends.)

It all points to a shakeout of sorts. "If you go back two years, you'll see there were many companies funded that shouldn't have been. There were so many crappy business plans. Today the valuations are more real," says Timothy J. Kraskey, managing director at Yankeetek Ventures, a privately held firm that specializes in early-stage funding. "VCs have gotten wiser."

Experts say the bearish trend may result in fewer companies getting larger amounts of funding, albeit at lower pre-money valuations than they originally would have liked. This trend is already evident in recent rounds awarded to vendors like Calient Networks Inc. (see Calient Raising $150 Million Plus). Calient received a huge round -- $225 million -- but only half the valuation it originally sought.

Another startup, World Wide Packets Inc., says it was a bit of a struggle to win a first round of $44 million without giving up more of the company than it would have liked (see World Wide Packets Raises $44M). "It took us a bit longer, but we stuck to our guns and wound up giving less than half of what typical VCs wanted us to give up," says CEO Bernard Daines.

Similar struggles are likely to become the norm. "You'll see larger, later-stage rounds for companies that are judged to be emerging leaders, that have pulled ahead of the pack," Wagner says. What you won't see, he asserts, are dozens of competitors being funded in the same space.

By all accounts, 2001 will be a proving ground for many. "We don't see a pullback from optical yet," says VentureWire's Andersen. "But a lot of money's already gone into the market, and it's not yet clear just how it's going to come back out through IPOs, mergers and acquisitions, or other strategies."

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

dlharding 12/4/2012 | 9:02:30 PM
re: Optical VCs Grow Wary Is it considered professional journalism to quote your own reporters as subject matter experts? Seems to me that if you want to be considered a good source of objective journalism, you would want to ask for quotes from people who are not on your payroll or that you don't have something to gain by promoting. Besides, I would think that Wall St. and Capital Market issues would be best drawn from people who work in that space and not vendor/supplier coverage analysts.

Scott might be a nice guy but quoting him left and right in your stories really comes across as a bit self serving....
Mary Jander 12/4/2012 | 9:02:30 PM
re: Optical VCs Grow Wary Any thoughts on the specific segments of the optical networking market that may be ripe for a shakeout?
mrand 12/4/2012 | 9:02:27 PM
re: Optical VCs Grow Wary This article says:

> What changed? The stock market. The performance > of the leading public companies in the stock
> market influences all of the financial activity > in the sector, including mergers and
> acquisitions and IPOs.

> "Tough times on the stock markets toward the
> second half of last year really made the
> funders, the equity and bond markets all much
> more careful about who they fund this year,"
> says Scott Clavenna, president of PointEast
> Research LLC and director of research for Light

... yet doesn't give a reason WHY the VC's care
about the stock market. Everyone knows the
VC's have gotten more picky because the
stock market went down - that's just News, not "News analysis". A complete analysis would
have discussed why they are so caught up in the
short term movements of the stock market (and
even better, why they were so willing to fund
almost anything at the "peak"... or were they?).
Steve Saunders 12/4/2012 | 9:02:27 PM
re: Optical VCs Grow Wary A good point, and one we've wrestled with.

Here's the score: Scott is not a reporter. He's a director of market research. He also as works as a consultant at his own company, Point East Research.

At the end of the day we decided that not quoting him would not serve our readers very well, given that he is the acknowledged expert in optical networking.

Obviously, we also quote other sources as much as possible. It's not an either/or situation.

Thanks for the message

Best,

Steve Saunders
co-founder
[email protected]
tryit 12/4/2012 | 8:56:22 PM
re: Optical VCs Grow Wary Arguments: Most Optical Network companies will become .Com.

Yes, Most optical companies have products, but
most of them do not and will not have customers.

Agree or not ?
Who whill survive ?
kingkong 12/4/2012 | 8:56:20 PM
re: Optical VCs Grow Wary I agree to a certain extent. As not .coms are failure, therefore not all optical networking are failures.

Ciena=+
Sycamore=+
Sorrento=+
Nortel= +
Lucent= +

Corvis= -
Zaffire= -
ONI= -
Inara= - in development stage backed by Raj Singh( a hit is not always a home run) rumored to have employees from Sorrento. these employees left because Sorrento did not go IPO I think. So imagine the mentality there...
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