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Funding for startups

Zepton Has an $86M War Chest

Zepton Networks Inc., the stealthy startup backed by a number of top-tier VCs, is quietly building up a healthy stash of cash. The company has bagged $86 million in venture capital funding since the beginning of this year.



In only two funding rounds -- a $50 million Series A round in April and a $36 million Series B some months later -- Zepton has amassed quite a war chest in a year when convincing venture capitalists to part with their money has been as difficult as teaching a mermaid to do the splits.

What's even more impressive are the names behind the company. Zepton's funding came from several investors, including Accel Partners, Applied Materials Ventures, Benchmark Capital, Juniper Networks Inc. (Nasdaq: JNPR), Kleiner Perkins Caufield & Byers, Sprout Group, Venrock Associates, and WorldView Technology Partners. CommVest LLC says it provided some debt financing for the company in June.

So, what is Zepton doing? Sources remain tight-lipped, and the company declined to return phone calls. But given the backgrounds of Zepton's managers, it stands to reason it would be a new kind of optical transport system with proprietary component-level technology.

It's clear that one reason the VCs involved are so giddy about the company is because of its management team. When times are tough, it's easier to bet on someone with past successes.

Jagdeep Singh, Zepton's founder and CEO, co-founded Lightera Networks (now a part of Ciena Corp. [Nasdaq: CIEN]). Later, he helped start a metropolitan area service provider company called OnFiber Communications Inc., which also attracted investments from KPCB (see Kleiner Perkins Scales Back).

The rest of the team is a combination of people that had worked with Singh on his two previous companies and others from large component and software companies. Drew Perkins, another Zepton founder, followed Singh from his two previous startups (see Zepton: Take Me to Your Leaders and OnFiber: Bottoms Up!).

"The majority of optical startups should not have been funded because they have no differentiating intellectual property to add to the industry," says Venrock's Tony Sun. "The problem is that there is too much capital available in the venture industry and every fund believes they are funding the winner. We believe Zepton is one of the few winners in the industry."

The company opted to close a second round partly because "they were being proactively contacted by interested investors and interested partners who wanted to invest," says Peter Wagner, a general partner at Accel. "Obviously, it's important to have the cash to fulfill your [business] plan and, given the interest that was there, it seemed sensible for the company to bring in some of these folks onto the team."

Founders Singh, Perkins, and David Welch; Benchmark's Alex Balkanski; KPCB's Vinod Khosla; Applied Materials' Dan Maydan; and Juniper's Pradeep Sindhu sit on Zepton's board.

- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
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HarveyMudd 12/4/2012 | 7:25:49 PM
re: Zepton Has an $86M War Chest ZEPTON funding is rather strange in that the company received a funding in the amount of $86 million without any product.

The ZEPTON's founders are serial company fonders with no long experience in technology, management or product development.

Of course, VCs can give any amount of money, but it is not their money.

No company public or private would buy products from start-ups. It is reasonable to assume that ZEPTON would not be in business for any length of time but would like acquired before it has completed the testing of its products.

It is not very clear how ZEPTON would introduce a new technology at the optical networking layer. It would not fly very well ZEPTON presents its technology for evaluation.

Any kind of integration of layer 1 and layer 2 integration would be considered a new product. Few copanies (e.g., Jasmine Networks) have trued this kind of approach. ut this approach did not bring any value to the product.

If ZEPTON has any new idea, it should file a patent because the usual trick of bing in stealth mode simply does not work.
rjmcmahon 12/4/2012 | 7:25:47 PM
re: Zepton Has an $86M War Chest Of course, VCs can give any amount of money, but it is not their money.
_____________________________

My understanding is that VCs get compensated via a 2% management fee and 20-30% of the carry, where carry is the ROI from the capital raised. In otherwords, the upside *is* the motivator while losing money doesn't help them.

Many VCs are going to close their doors due to poor investments (and the herd mentality). I was told that only 6 of 1000 consistently out perform the NASDAQ, while they all claim to be in the top 25% among their peers. (I find this kinda funny)

Anybody investing their time with a startup should understand whose behind the money and how an ROI will be generated, if ever. If the management doesn't give a satisfactory answer, their probably not worth trusting. Any indication of mistrust should raise a red flag because the management interests are not always aligned with the employees interests as they should be.

Paying the investors first does seem fair. It is their money. They could choose to buy RBOC stock with it which would strengthen the status quo and limit the future of our children and our grandchildren. (A brief review of the history of the Gutenberg press reveals how the 16th century status quo limited societal progress, in my opinion)

As an aside, the three tech spaces which need to be developed are:

1) Last mile fiber - 1.5Mbs at $1000+ per month limits the potential of an information society. It's worse than dirt roads and horses, in my opinion.

2) Unicast video with democratized access, where fees for access and fees for content are decoupled, allowing a small independent producer to make a living.

3) Consumer digital electronics devices where the device itself was the revenue generating consumable.
Dr. Freud 12/4/2012 | 7:25:46 PM
re: Zepton Has an $86M War Chest "If ZEPTON has any new idea, it should file a patent because the usual trick of bing in stealth mode simply does not work."

Fine, but let's address whether demand exists. I dont think it does. Carriers dont want to hear about any new technology: they already have 10 vendors pounding down the door to address solutions for virtually every segment in their network.

The market for optical equipment is SHRINKING. Even the edge is beginning to slow. Haven't you seen Lucent, Nortel and Ciena's latest filings? Next quarter is exprected to come in lower than the previous in terms of sales.



rjmcmahon 12/4/2012 | 7:25:45 PM
re: Zepton Has an $86M War Chest So the question would have to be at what point is a company no longer a start-up?
_____________________________

My answer would be when the company could meet its payroll and its debt obligations via its revenues. Others may say its no longer a startup when the control investors exit and company stock trades on a public market.

The point that RBOCs won't buy equipment (beyond trials) from a startup seems valid. RBOCs will need to see long term viability amongst other things before writing any big checks to an equipment vendor.
sonet49er 12/4/2012 | 7:25:45 PM
re: Zepton Has an $86M War Chest Harvey,

How many companies, private or public bought product from Cerent before the Cisco buyout or from Juniper?

I believe the answer is greater than 0.

So the question would have to be at what point is a company no longer a start-up?

flanker 12/4/2012 | 7:25:38 PM
re: Zepton Has an $86M War Chest How many companies, private or public bought product from Cerent before the Cisco buyout or from Juniper?


Ancient history. Vendors wont be signing contracts > $25mln with anyone without a credit rating, public float, an order book, deployed product and $200mln in cash on hand in 2002.



fk 12/4/2012 | 7:25:36 PM
re: Zepton Has an $86M War Chest Ancient history. Vendors wont be signing contracts > $25mln with anyone without a credit rating, public float, an order book, deployed product and $200mln in cash on hand in 2002.

This sounds like you don't think that any startups will sell to large accounts. I doubt this is the case. It sounds as though the pendulum is now all the way the other direction from where it was two years ago. Back then, every startup was going to make it. Now, none are? The answer, as it so often does, lies somewhere in the middle.


flanker 12/4/2012 | 7:25:34 PM
re: Zepton Has an $86M War Chest
I think the vc backed publicly traded firms (JNPR, SONS, CORV, TELM, SCMR) will have trouble surviving 2002 without getting hitched, and they have a lot of cash. I think its even tougher if you are private.

The other related question is - how does the VC get his money back with a decent return if all the company is doing is sitting on cash and burning overhead until the equipment market comes back?


Scott Raynovich 12/4/2012 | 7:25:33 PM
re: Zepton Has an $86M War Chest Mudd, in general I've stayed away from your comments. But at this point I'd like to ask:
What are you talking about?

VC money is private money, not public money.

what exactly do you do for a living, anyway?
HarveyMudd 12/4/2012 | 7:25:33 PM
re: Zepton Has an $86M War Chest A lot of things need so be said and investigated regarding ZEPTON. It is wrong to waste public company by giving $86 million to serial enterprenuers.

There has been a lot of adventures in company fundings. This specially occured in the dot com and optical netqwoking areas.

Quite a large number of dot com, optical networking and storage company were funded by the VCs without conducting due diligence. Many recipients of these funds were companies with overseas connections that formed a very weak technical and management team assempbled hastly for the purposes of getting funding.

Immitation products and technologies contiue to be a big problem in most market segments.
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