Funding for startups

Zaffire Gets Zapped

It’s only February and already it looks like Zaffire Inc. is not having a good year. A month after the metropolitan area DWDM startup announced a $20 million contract with FiberStreet Inc., the service provider has gone out of business (see Zaffire Scores $20M Contract).

Last Friday FiberStreet, an IP/Ethernet service provider, shut its doors for good and dismantled its Website after it was unable to find investors for its second round of funding. Crescendo Ventures and Morgenthaler Ventures had both contributed $2.5 million to the company’s $6 million first round about nine months ago. But the firms were unwilling to continue pouring money into the project.

“It was more a matter of timing than anything else,” says Jeff Hink, general partner with Crescendo. “With the markets the way they are now, we were unable to get a large syndicate to participate in the round.

“Service providers require hundreds of millions in capital before they even break even. And we couldn’t do it on our own."

For Zaffire, FiberStreet’s collapse is a serious blow as the company struggles to carve out a legitimate niche in the metro area market. While the startup boasts that it has 15 deployments in 11 service provider networks, it has only announced two: FiberStreet and BroadBand Office Inc., which is also rumored to be in financial trouble (see Kleiner Readies BBO's Rebirth).

But this is not the only bad news to come out of Zaffire lately. Recent shuffles in upper management spurred a wave of negative grumblings throughout the industry (see Zaffire: 'We're not for Sale'). And the day before the company announced its $20 million contract with FiberStreet, it was in the midst of a PR crisis. The company had just laid off 20 percent of its sales team (see Zaffire Fires 20% of Sales Team). The announcement seemed like an attempt to quell worries and reassure investors that the company was still on track.

Now with FiberStreet out of the picture, the company seems to be back where it started.

The FiberStreet/Zaffire situation is not unique. New service providers tend to be some of the first customer wins that startups announce. And while revenue isn’t always realized right away, it gives investors something to look forward to in the future. But as more and more of these service providers go out of business due to a lack of funding, system startups are hard pressed to show real customers to investors.

CoSine Communications Inc., which makes an IP service delivery platform, found itself in a similar situation to Zaffire when U.K.-based AduroNet Ltd. started winding down its business last week (see AduroNet Goes Bust). Like FiberStreet, AduroNet agreed to buy $20 million worth of CoSine equipment and then went out of business.

Other startups have complained that service provider instability has caused them to waste valuable time and resources in setting up deals with companies that end up crashing. For example, Ellacoya Networks Inc., a service provisioning startup based in New Hampshire, had been in talks with Digital Broadband Communications when the Boston-based data CLEC went bust earlier this year, according to Michael Welts, Ellacoya's VP of marketing. (see Digital Broadband Fades Away)

Dan Gatti, president and CEO of Mayan Networks Inc., a next-generation Sonet startup, says that the current market conditions have resulted in several setbacks for his company. And after a year of marketing hype, Mayan still hasn’t announced a customer win.

“There are a number of CLECs in trouble now,” he says. “And we’ve worked with a couple of them. Sure, it impacts us, because you have to spend a lot of effort and time to get the sales traction with customers. It just makes your product ramp that much slower. ”

As for Zaffire, it’s still up in the air how the company will survive this latest bout of bad news. For now, the company has refused to comment on the FiberStreet situation.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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voyeur 12/4/2012 | 8:53:37 PM
re: Zaffire Gets Zapped What's not objective? They posted bad news, but it seems everyone has their share. In this day and age, everyone may seem to have a negative slant, but the climate is just very negative for all tech stocks, especially for start-ups.
Jimi 12/4/2012 | 8:53:37 PM
re: Zaffire Gets Zapped Fiberstreet bows out...big surprise in this day huh? NOT! It happens. Shouldn't your headline read "FiberStreet gets Zapped"? I'm starting to wonder if Marguerite Reardon got fired from Zaffire. You all sound bitter at Zaffire.

Why not tell us something worth reading? WHY not tell us why FiberStreet couldn't come up with the funding? Tell us the roadblocks that prevented their success. Like in your story "Shutdowns Send Dark Message" - 2/13/2001. So what that Zaffire was the chosen vendor in that account! I don't care! Tell us why the FiberStreets' of the industry are stumbling. Why did they NOT make it and why do the Cogent's and the Yipes of the world hang on to funding? What did FiberStreet do wrong?

And don't try to tell me it's because they picked Zaffire because that would be garbage. The rumor mill had it that ONI was displaced by Zaffire in that account. I would think that that is a moral victory for the gang at Zaffire. But who cares about that right?

Lightreading, you all get to talkin' like a bunch of hens. Just yappin about anything. CLUCK CLUCK CLUCK.

GIVE US SUBSTANCE or maybe you should think of pulling the plug on your own website. Or rename it something like LightBarfing. BLEH!
observer2 12/4/2012 | 8:53:37 PM
re: Zaffire Gets Zapped I really think lightreading is not objective at all. Especially the editor who coveres Zaffire has a consistent and negative feeling about the company. Maybe someday when lightreading is bankcrupt and he will put "Zaffire's magazine is going out of business" as the last article.
lightreading 12/4/2012 | 8:53:36 PM
re: Zaffire Gets Zapped I'd call it another case of good ole light reading sensationalistic journalism. you see the article 'Shutdowns Send Dark Message' ran a couple of days ago. it doesn't take a rocket scientist to figure out the only way to cover this story and get people to read it is to trump it up with a new spin and some dirt. real genious stuff... ...pulitzer prize winning journalism it is not.
nick p 12/4/2012 | 8:53:36 PM
re: Zaffire Gets Zapped you are boring, and obviously work for Zaffire.
observer2 12/4/2012 | 8:53:36 PM
re: Zaffire Gets Zapped What is objective? Be straight. That is objective.
FiberStreet went out of business but not Zaffire. Why don't lightreading put "FiberStreet gets zapped" instead of "Zaffire get zapped"?
nick p 12/4/2012 | 8:53:35 PM
re: Zaffire Gets Zapped Zaffire trumpets its big customer all over town. Two weeks later the customer goes bust. That's news. This is just another in a long line of embarassing episodes from Zaffire.

Person 12/4/2012 | 8:53:34 PM
re: Zaffire Gets Zapped I'm the spouse of a Zaffire employee.

This is atrocious and mean-spirited.

The article should read "Fifth Rate Reporter Reveals Axe to Grind." In my 25 years as a journalism professor, I have rarely seen such naked hatred of a reporter for her subject.

My wife tells me this guy Steve has mounting problems of his own. My only advice to the 300 people at Zaffire - "You guys are the best!"
More_LightReading_Junk 12/4/2012 | 8:53:34 PM
re: Zaffire Gets Zapped Yes, this is crappy reporting. I just read the Cisco article and it was a joke too.

Light Reading will go out of business in due time as well. People (myself included) are getting tired of shabby, tabloid reporting.
shut up 12/4/2012 | 8:53:34 PM
re: Zaffire Gets Zapped It is very obvious that Lightreading has a vendetta against Zaffire....or is it just you Marguerite Reardon that has this vendetta?

You and/or Lightreading must be a shareholder in Zaffire's competition? The SEC might want to investigate this.

You should be ashamed (do you like having a National Inquirer reputation?)
Pretty soon you won't have any readers because you are a tabloid rag that posts articles that are not true and biased for your own benefit.
How about this for the headliner when you go belly up:

And by the way...this is called slander.
I think Zaffire should take legal action against you.
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