Shutdowns Send Dark Message
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Lack of funding has skewered the plans of several next-generation Internet startups in the past few weeks -- sending a clear warning that an economic slowdown in capital funding isn't just talk.
In a veritable St. Valentine's Day Massacre on the IP front, a trio of startups have expired or fallen badly during the past week alone, including would-be global bandwidth supplier 1CyberNetwork Ltd., IP switch vendor Point Reyes Networks Inc., and IP provisioning vendor IPHighway Inc.
In all three cases, backers have pulled the plug on further funding. That other startups are getting record rounds (see GiantLoop Lassos $120 Million , $60M to Fuel IntelliSpace Expansion , Astracon Has $25M Round Two , Codeon Raises 37 Million , and Yipes Closes $200M C Round ) indicates that investors are getting choosier about which companies will be funded and which ones won't (see Optical Investment Expected to Slow ).
Here's a summary:
Last week, 1CyberNetwork closed the doors of its worldwide headquarters in Rockleigh, N.J., and dismissed its employees in the final act of a long, sad drama. The project, started originally in 1997 by entrepreneur Neil Tagare as Project Oxygen, called for creation of a worldwide fiber optic network covering 300,000 kilometers and more than 170 countries.
Tagare, who'd originally helped launch FLAG Telecom Ltd., hoped to finish the project by 2003. But his budget of $10 billion to $14 billion was nearly impossible to fund at a single blow, despite support pledges from the likes of carriers AT&T Corp. (NYSE: T - message board) and Telstra Corp. and backing from VC firm Pacific Century CyberWorks (PCCW). By May 2000, PCCW put the project on life support, changing its name and mission. By that time, however, huge amounts of market share had gone to nimbler carriers -- such as Global Crossing Ltd. (NYSE: GX - message board) -- whose business plans were less challenging. Life support was pulled, and the project breathed its last.
In the case of Point Reyes, being turned down for a second round of funding has sent the switch vendor scrambling. "We're looking into our options," said a company source who requested anonymity. If the firm can't raise the money somewhere else, it may have to sell its technology.
Point Reyes was seeking to gain a foothold in the competitive and still-very-new market for switches that use multiprotocol label switching (MPLS) to create more profitable IP networks for carriers (see The Service-Aware Switch ). The vendor faced stiff competition from Tenor Networks Inc., and it needed big bucks to get the job done.
"To enter the MPLS core switch market is very tough, very expensive," says Scott Clavenna, president of PointEast Research LLC and director of research at Light Reading. Among other things, companies must build line-rate OC192 packet processing into their wares, he says -- a costly proposition.
IPHighway hasn't folded yet, but spokespeople there confirmed today that the company has laid off its sales and marketing force -- in an effort to face up to a disappointment about venture funding. "The capital markets have been very difficult for the past three months," says VP Paul DeBeasi. "Basically, it's lengthened our fundraising time."
Some analysts think pulling the plug on IPHighway is premature. "They have some great folks; they were modifying their software for the carrier market," says David Passmore, research director at The Burton Group. He thinks IPHighway already has the goods and that it's "silly" for VCs to look elsewhere for provisioning startups. "They just basically have to give their enterprise QOS package a lobotomy," he quips.
These are just the most recent examples of an overall slowdown in capital funding that's spelling doom for a number of startups. At the end of January, IronBridge Networks Inc. underwent a restructuring (see IronBridge Has Fallen Down ). Other funding casualties include Digital Broadband Communications (see Digital Broadband Fades Away ) and Britain's Aduronet (see AduroNet Goes Bust ).
-- Mary Jander, senior editor, Light Reading lightreading.com
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