Venture Funds Bet on Bridging 'Last Mile'
Sunday August 5 1:17 PM ET
By Jim Christie
SAN FRANCISCO (Reuters) - Venture capitalists are chasing a lucrative breakthrough many see as just over the horizon -- bridging the proverbial ``last mile'' to link metropolitan-area optical communications networks to long-haul networks.
In recent months, venture capital has been making big contrarian bets on start-up communications component makers whose products promise to ``light'' fiber already in the ground by connecting major networks and their would-be urban customers.
The pace of venture funding shows no sign of letting up even in the face of an inventory glut and overbuilt networks that have made the year one of the most punishing for investors in such publicly traded suppliers as JDS Uniphase Corp. (JDU.TO).
``The long-haul networks are all pretty built out, but on the metro-network side, we are going to need some advances,'' Doug Robertson, a principal with Palo Alto, California-based Crescendo Ventures, told Reuters.
Many see cities as having the potential for a broadband bonanza. Businesses and households want high-speed Internet links, but the metro-area networks that would deliver that service pose more complex problems than ``long-haul'' networks, whose fiber is strung over long, unobstructed distances.
In short, the builders of metro-area networks face the same problem infantry do in urban combat: they have to take buildings one at a time.
These ``last-mile'' lines require funding novel tactics, such as sending robots into sewers to bolt fiber to tunnel walls and then leading them into basements, a venture-funded system privately held Silver Spring, Maryland-based CityNet Telecommunications will implement in a number of U.S. cities.
The plan seems especially brash in light of the mauling so many public telecom heavyweights are getting, underscored by their layoff announcements.
JDS Uniphase, for instance, will cut 16,000 of 25,000 workers. Nortel Networks Corp. (NYSE:NT - news) is slashing 30,000. Lucent Technologies Inc. (NYSE:LU - news) will cut up to another 20,000.
The S&P Communications Index has fallen in value for nine of the past 12 months. The benchmark index has lost 55 percent this year, compounding a 56 percent decline in 2000.
BREAKTHROUGHS FOR BUILD-OUTS
``There is plenty of fiber in the ground that is begging to be lit,'' said William Seifert, a general partner with Westwood, Massachusetts-based Prism Ventures. ``This sector is ripe for a lot of change because there are a lot of moving parts.''
Semiconductors are some of the most critical parts in optical networks, and venture cash -- including some from corporate venture units -- is backing companies working to improve them.
Fremont, California-based Genoa Corp., for instance, in March raised $75 million, including cash from Global Crossing Ltd. (NYSE:GX - news) and the WorldCom Venture arm of network service provider WorldCom Inc. (Nasdaq:WCOM - news), for its chip-based ``photonic'' amplifier.
The amplifier is the size of a sugar cube but can process dozens of light wavelengths without distortion, making optical networks more efficient and less expensive to operate.
Last month, Cisco Systems Inc. (Nasdaq:CSCO - news) and a unit of Corning Inc. (NYSE:GLW - news) joined other investors in giving $33 million to San Diego-based LightPointe.
Privately owned LightPointe, which has raised $51 million in under 10 months, makes products allowing telecom carriers to speed deployments of optical systems in metro areas.
That followed another Corning venture play in early June, joined by Lehman Brothers Holdings Inc. (NYSE:LEH - news) and Intel Corp. (Nasdaq:INTC - news), in a $45 million financing Celion Networks, a year-old Richardson, Texas-based optical components maker.
Venture money is also going to optics companies abroad.
In late July, London-based Storm Telecommunications, an optical service provider, announced $35 million in new commitments from investment affiliates of Soros Private Equity Partners, Merrill Lynch Ventures and others.
Storm, now with $400 million from investors, said its latest funding round will allow new services for business customers that complement its pan-European optical network.
FOCUS ON END-USERS
Crescendo Ventures' Robertson told Reuters that venture capital will continue to flow to optical start-ups as investors look beyond telecom's current problems
According to Jeff Yu, a principal with Crescendo Ventures, such backing for component makers will be forthcoming for very basic reasons.
``Components have really been the enablers,'' Yu said. ``For people looking forward, components again will enable the next wave of innovation.''
A recent $10.5 million funding of Reston, Virginia-based optical switch designer Civcom Inc. and a recent $6 million in financing for Albuquerque, New Mexico-based Zia Laser Inc., a developer of ``quantum-dot'' semiconductor lasers, point to venture backers' willingness to fund innovations at the nuts-and-bolts level of optical networks.
``I think people realize that optics will definitely be around,'' Yu added. ``It's a question of how to get optics to penetrate deeper and get closer to end-users.''
End-users -- whether businesses or households -- figure prominently in the hopes of telecom-sector companies.
Gary Smith, chief executive of CIENA Corp. (Nasdaq:CIEN - news), which makes products for fiber-optic networks, said that pent-up demand is the way out of the dark tunnel in which so many telecom companies seem stuck.
Optical networks and component makers will be helped by the continued explosion in Internet traffic, even though the short term will prove a rough time for many, he told investors and analysts at a recent San Francisco conference.
``We should not lose sight of the fact that the end-user demand is still there,'' Smith said. |
