Capital Rut Has Little Weight For Internet Route Controllers
By LISA BRANSTEN
Staff Reporter of THE WALL STREET JOURNAL
Which Way?
No matter how tough the economy gets, companies still are willing to spend on technologies that save them money. That's one reason venture capitalists are becoming attracted to a group of start-ups that help direct traffic flow on the Internet.
Often referred to as "route control companies," these firms specialize in technology that analyzes Internet traffic and then picks the best routes for that data according to certain criteria. For example, businesses can tune traffic so that employees access critical software over the highest quality networks while using cheaper providers for less sensitive work such as checking e-mail. Some products also allow companies to spread out their traffic among different Internet-service providers when service is cheapest.
In the past couple of years, four companies in the category have attracted nearly $120 million. One, Route Science Technologies, based in San Mateo, Calif., raised $30.5 million in November. Another, netVmg (www.netvmg.com) of San Jose, Calif., has raised $27 million to date and is in the process of raising more. Other companies in the sector include Proficient Networks (www.proficient.net) of San Francisco and Sockeye Networks (www.sockeye.com) of Newton, Mass.
The market for such services could be as big as $2 billion by 2005, says Peter Christy, a co-founder of market research firm NetsEdge Research Group in Los Altos, Calif.
Initial reactions are positive. Adam Joffe, director of technical operations for Sony Online Entertainment, says the netVmg software he is testing has saved him 20% to 40% by routing traffic via the cheapest provider.
But it won't be easy for these companies. For one thing the best business model remains unsettled with some companies offering the technology as a service with others selling software, hardware or a combination of the two. Both netVmg and Route Science have shifted from service to product companies. Also the competition between the upstarts should be stiff.
After losing its chief executive in December, netVMG is being run temporarily by Peter Wagner, a partner at Accel Partners, which was one of the company's investors. Mr. Wagner says he looks at the competition as validation that there is a market for "route control" products. "There's never been a good category that only had one company in it," he says. "You develop a company that's No. 1 in that category and that's how you build value."
Any Idea?
A lot more than money was lost during the investment boom. As entrepreneurs gained in power and financiers scrambled to get into hot deals, investors gave up many rights, too.
Consider what's happening for investors in idealab. The incubator started by serial entrepreneur Bill Gross raised about $1 billion in March 2000, giving the company a value of about $9 billion. No board seats, however, went to investor representatives.
Now some investors are angry about idealab's performance, which includes a string of shuttered companies such as eToys and Eve.com. They're angling to liquidate the company and get their money back. Without a board seat, however, they have little power. So when idealab offered last month to buy investors out at 10 cents on the dollar -- an offer that expires this week -- it was either take it or leave it.
Some call the offer unfair because they think they'd get more if the company just shut down. The buyout would cost idealab about $103 million if every investor took the offer, according to Marcia Goodstein, president of the Pasadena, Calif., company. Meanwhile, the company has more than $200 million in cash and about $180 million of stock in one of its most successful companies, Overture Services, formerly known as GoTo.com.
Ms. Goodstein says the offer is a good one. It values the company at about $900 million, about twice its true value, she says. It also reflects only a 90% decline in value over a period of time when some similar companies lost more than 99% of their value.
Late last year negotiations occurred over whether to put a representative of the last investors on the board, Ms. Goodstein says. The company took a pass. First, it was under no obligation to do so. And second, she says, angry investors didn't offer a candidate that met the company's one criterion: "We'd be happy to have a board representative who recognized idealab as a going concern."
Seedlings
Many telecom equipment companies have been having a hard time raising money. But Telica of Marlboro, Mass., has raised $60 million for product development and to increase sales and manufacturing. Telica returned to existing investors Highland Capital Partners and Oak Investment Partners to lead the new round. Telica says those investors decided to step up again because they like the company and because other potential investors offered money on onerous terms. Also, Trillium Photonics is announcing that it has raised $29 million in a second round of financing that was led by Spectrum Equity Investors and included JK&B Capital and Mohr, Davidow Ventures. The Ottawa company makes components for optical networks.
Write to Lisa Bransten at lisa.bransten@wsj.com
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