VCs Boost Optical Investments

Venture capitalists who like to sing the praises of optical networking's potential don't see the pace of investment slowing down any time soon.

In an already record-high year for venture financing overall, investments in optical concerns were part of the fastest-growing business segment as tracked by PriceWaterhouseCoopers' MoneyTree survey. The telecom sector (which includes optical networking companies) attracted $4.4 billion in venture funding during the second quarter of 2000, up from $2.9 billion in the first quarter, according to Kirk Walden, national director of the MoneyTree Survey.

While the recent moves of components giant JDS Uniphase (Nasdaq: JDSU) have brought new interest to the building-blocks side of the business, VCs say they are still also looking at system ventures, especially those that have a mature product and a large market upside. They also predict that the funding game for optical networking is just getting started and that the stakes will get higher as more players vie for a piece of the pie.

"There is a sufficient economic carrot in the truly big opportunities available," said Peter Wagner, general partner with Accel Partners, explaining the buzz building around optical-networking investments. Still, Wagner warns that not every optical startup can live up to its investors' hopes.

"Given the froth [of the optical market space], many companies are getting funded at high valuations -- I don't think that's good, and I don't think it can last," he said. "The market right now looks a little like biotechnology, and that's not all good. There's a lot of research being done that's being funded by VCs."

Optical components companies are commanding special interest from those that believe that they're just starting to come into their own.

Rob Soni, managing general partner at Bessemer Venture Partners, said that just a few years ago, investors weren't too excited by components producers, "since the companies were more R [Research] than D [Development]." But Bessemer, he says, has long been focused on the components side of the business, since "if you look at the boxes, it's all about the components [inside]."

Bessemer, an early investor in Ciena (Nasdaq: CIEN), has invested in photonic switching subsystems manufacturer Optical Micro Machines, and recently invested in another components startup, Telephotonics, of Wilmington, Mass. According to Mr. Soni, there is plenty of room for further innovation, especially in the components space.

"The industry is very early on in the curve," said Soni. "There's tons of innovation left, in matters of speed, tunability, and how to build devices more quickly."

Accel's Wagner, however, doesn't see components surpassing systems in importance; what matters, he says, is the potential size of the market.

"So many [startups] we see are niche projects, it's hard to imagine them getting big," Wagner said. "The opportunities we're trying to focus on are those that provide core building blocks, not just incremental performance increases."

Accel has invested in companies like Avici (Nasdaq: AVCI), Tellium and Bandwidth9. In the case of its most recent investment, a Sunnyvale startup called BigBear Networks, Accel not only led a $20 million investment round (with Sequoia Capital), it also installed partner Bill Lanfri as acting CEO. BigBear, which is still mostly under wraps, will produce "optical modules, or subsystems," according to Wagner.

Overall venture investments for the first half of 2000 total $36.7 billion, according to the MoneyTree survey. That figure already tops the $35.6 billion invested in all of 1999. Though the survey doesn't specifically track optical-only investments, MoneyTree's Walden says all networking infrastructure investments are on the upswing.

"It's 'give me pipes, get the data through there faster,'" he said. Technology-related investments, Walden noted, accounted for almost 95 percent of all investments in the second quarter of 2000, with infrastructure easily outdistancing Internet retail and other segments.

"E-commerce is way down, infrastructure is way up," Walden said.

-- Paul Kapustka, Silicon Valley bureau chief, Light Reading http://www.lightreading.com

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