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