5/10/98 Boston Globe article on Aptis, XCOM and other start-ups. [ASND reference]
boston.com
Golden start-ups
By Ronald Rosenberg, Globe Staff, 05/10/98
Promising technology and valuable employees made these
companies so attractive they were acquired before they turned
two years old.
Aptis Communications | New Oak Communications |
Priminet Corp. | XCom Technologies | Aris Networks Inc.
In January 1997, five engineers quit
their jobs to pursue a dream of
starting their own company and making
it a big success. Working in the
basement of one of their homes, they
founded Aptis Communications Inc. to
develop high-speed switches for
quicker Internet connections. With luck,
they figured, they could bring their
device to market in 18 months, hire a
sales force and, perhaps in a few years,
make a big financial score by taking
their company public.
They figured wrong. They didn't
introduce a product or hire a sales staff.
Their dreams came true too fast for
such tasks.
Two and half weeks ago, only 14 months after they started Aptis, the
engineers closed a deal to sell their fledgling company for $305 million in
stock and cash to Northern Telecom Ltd., the giant Canadian
telecommunications company. Northern Telecom made the acquisition
based on a prototype of a switching device now in final testing.
''We thought we could ramp up our business and then we would have the
option to either build it or be acquired,'' said Paul Gustafson, Aptis
cofounder, president, and chief executive. ''But being acquired before we
had revenue was not what we expected or planned for.''
Aptis's overnight success, which made paper millionaires of about half of its
50-person staff, was not an isolated event. A string of deals has seen small
Massachusetts start-ups snapped up by major telecommunications and
computer networking companies hungry for new ideas - and the talent that
developed them.
As a result, at least in these rapidly evolving sectors, the days of growing a
company over time are disappearing. Now, the goal is simply to come up
with innovations that will entice one of the big players.
The scramble to acquire telecom start-ups with promising technology is
similar to what has been happening for years in different high-tech sectors
of Silicon Valley, where it is not unusual for hot emerging companies to be
sold before they enter the market with a product.
''Big companies recognize that innovative products addressing new markets
come out of start-ups,'' said Paul J. Ferri, general partner at Matrix
Partners, a Waltham-based venture capital firm that specializes in launching
telecommunications firms. ''That's the opportunity that start-ups see.''
Potentially, Aptis and the other companies acquired recently could have
realized even greater riches if they had fully developed product lines and
then sold stock through initial public offerings.
But as Richard M. Burnes Jr., a general manager at Charles River
Ventures, which invested in Aptis, put it: ''How do you tell a bench
engineer who took a risk taking a job with a start-up, has a wife and three
kids, drives an old Toyota Celica, and has a $125,000 mortgage that he
should wait and let the business develop, when the company has just gotten
an acquisition offer that would make his stock options worth $2 million?
''With very few exceptions, you take the offer,'' Burnes said.
That certainly has been the case in the last two years, as companies barely
out of the planning stages have decided to sell now rather than wait for a
payoff down the road.
Prominet Corp. in Marlborough was 20 months old when it accepted a
$200 million stock deal last fall to sell to Lucent Technologies, an AT&T
spinoff that has quickly become one of the leaders in the
telecommunications field.
In January, New Oak Communications Inc., an Acton firm nurturing an
Internet product that helps control access to corporate computer
networks, agreed to be acquired for $156 million by Bay Networks Inc., a
major firm based in California. New Oak was 16 months old when the
deal was made.
Last month, XCom Technologies, a Cambridge firm that had just launched
a voice and data switching service geared to the Internet, struck a $168
million stock deal with Level 3 Communications Inc. of Omaha. The deal
closed only 11 months after XCom received its first venture capital infusion
to develop the service.
As staggering as these amounts may be to the founders of these young
companies, to Northern Telecom, Lucent, Level 3 Communications, and
the other dozen or so multinational giants that dominate the field the
amounts are relatively small and the potential payoffs can be huge.
All the recent deals not only provide the acquiring firms with cutting-edge
products they can complete and market quickly but also lock in the
services of the engineers who created them. In most cases, the deals
require that a start-up's development team continue to work for the
acquiring company, with stock and cash being paid out over several years.
''It is the good ideas developed by entrepreneurial groups who work seven
days a week for eight or nine months straight that can create enormous
value,'' said James Q. Crowe, president and chief executive of Level 3.
Start-ups are well aware that the telecommunication giants are sizing them
up at an earlier stage than ever before. ''Since the first of the year, the
intensity of big companies looking at us was overwhelming, almost a
distraction,'' said David F. Callan, who founded XCom along with Shawn
Lewis.
The two former consulting engineers each received more than $22 million
in stock when Level 3 completed the acquisition of their company last
month. Callan, 37, and Lewis, 29, will work for Level 3 to clone their
Cambridge operations around the country. Like the founders of other
start-ups, the attraction of joining up with a big company, besides the
money, is the chance to develop their initial idea at a much faster pace and
on a national scale.
''I want to help create AT&T 2, the next generation communications
company, and time is everything,'' said Callan.
Not every start-up is as fortunate as XCom, and venture capitalists say that
many new companies must still try to make it on their own, following the
old familiar route of marketing a product, growing the firm, and then going
public.
''I tell the start-ups that we finance, 'Don't count on Lucent to be there to
buy your company,''' said Ferri, who nevertheless has had three winners
after investing in Prominet, New Oak, and XCom. ''So you always have to
build a management team as if you were creating an independent company.
But too many start-ups don't think that way.''
''This is just the beginning''
Creating an independent company was exactly what Aptis's founders had
in mind, according to Gustafson. In January 1997, the softspoken engineer
formed Aptis (the name is a variation on the Latin word ''aptus,'' which
means connection) with three former colleagues from Shiva Corp. of
Bedford and an engineer from GTE Laboratories in Waltham.
The team worked at first in the basement of cofounder Christopher
Outzen's Sudbury home developing a business
plan. Their work attracted interest almost immediately, although not the
type they anticipated. With five cars parked in front of Outzen's home
every day and into the evening, the local zoning board became suspicious.
An official knocked on the door to investigate.
''The Sudbury zoning fellow thought we were running a gambling center,''
Outzen said. ''We told him we're just a bunch of geeks starting a company,
and he asked us to find office space, which we did.''
Initially, the team considered developing a higher speed telephone modem
but abandoned that idea in favor of building a sophisticated switch that can
pool hundreds of calls from business and residential customers and send
them on to an Internet service provider.
Gustafson and his team noticed that their only major competitor was
Ascend Communications Inc., a fast-growing company in Alameda, Calif.
Ascend developed a smaller switch designed for the corporate market, but
it was too small for telephone carriers, which were looking for a more
powerful system.
The Aptis team also saw that Arris Networks, a Westford company that
had developed a product similar to their concept, had been acquired by
Cascade Communications, also of Westford. But when Ascend, in turn,
acquired Cascade last year, the Arris project was shut down, Gustafson
said.
''The combination of Ascend's smaller switch plus not having Arris around
gave us the market opportunity,'' said Gustafson. ''The risk was we were
going after an existing market with an improved product and a limited time
to develop it.''
Working six and seven days a week, Gustafson and his crew hired some
former Arris engineers and 10 colleagues from Shiva, who in turn recruited
15 engineers from Cascade.
''The premium we put on ourselves was in execution,'' Gustafson said. ''We
knew from the venture capital people that if we could not deliver a product
in 12 to 18 months, don't bother.''
By early December 1997, Aptis had finished developing the switch and
was about to receive additional venture capital to launch a sales and
marketing effort. A week after securing the new financing, the call came
from Northern Telecom.
Apparently, the giant Canadian company had spotted an item about Aptis's
idea in a trade publication. Best known for its telephone voice routing
systems, Northern Telcom saw the Aptis switching device as a way to
enter the fast-growing data and Internet markets, which place a premium
on the ability to move large numbers of phone calls quickly.
Aptis agreed to allow Northern Telecom engineers to evaluate the switch,
capable of handling 1,244 phone calls at once. The switch passed the tests.
For Aptis, doing a deal made sense, even though the company was about
to launch the switch on its own.
''If we sold our products on our own, we might do $50 million in sales in
our first year, but with Northern Telecom, they can easily sell more than
$100 million in the next 12 months and probably double that in the next
year,'' Gustafson said.
For Northern Telecom, buying Aptis while it was still in its infancy was
crucial because its valuation after a public stock sale, which Gustafson had
hoped to hold next year, may have placed it out of Northern Telecom's
reach.
All that was left was negotiating a price. In the end, Gustafson's
management team and venture capitalists, which owned about 60 percent
of the company, estimated what the company's value would be at the time
of an initial public offer and subtracted the manufacturing, sales, and
distributions costs that Northern Telecom would bear. The final figure was
$305 million.
Both the Aptis engineers and Northern Telecom were happy. Gustafson
and and team will be working for the company for at least the next several
years.
''When I look out at what's ahead of us, this is just the beginning,''
Gustafson said.
A feature on the growing market of computer resources to assist those with
disabilities, and a host of other resources geared toward small business, is
available on the Globe's Web site Boston.com at boston.com.
Use the keyword: Emerging.
This story ran on page E01 of the Boston Globe on 05/10/98.
c Copyright 1998 Globe Newspaper Company.
|
