With silicon poised for customer trials next quarter, fabless semiconductor firm Azanda Network Devices Inc. is expected to announce today that it recently convinced venture investors to buy into the first tranche of its Series B offering to the tune of $19 million.
Apparently, it wasn’t that hard of a sell. In fact, the Sunnyvale, Calif.-based company expects to raise “significantly north of $20 million” before holding a final close on the deal, says Steve Dines, the company’s president and chief executive officer. “We believe at this point we have a bunch of investors on the hook,” he adds. “We’re not so much trying to send the message, Hey, we’re out there, come offer us money,’ but we will have to go through another close in the Series B.”
Inside investors Bessemer Venture Partners, Common-wealth Capital Ventures and Highland Capital Partners co-led the transaction, with Bessemer and Highland coming in significantly above their pro rata rights, Dines says. Series A backer Goldman Sachs, which previously had held a minority stake in the company, also stepped up its commitment this time around.
That Azanda’s VCs chose to keep the round open to accommodate a few outside stragglers is a telling sign of the current market conditions, says Sean Dalton, a general partner with Highland. “If this was 1999, we would have closed this round [at $19 million] and started fund raising again later this year,” he adds. “In this market, though, we tend not to be as concerned with dilution as getting quality investors into the company.”
When all is said and done, this latest infusion is expected to carry Azanda to the break-even point, a milestone the company hopes to achieve by the end of 2003. Worst-case scenario, the company will have to return to the private equity arena once more to raise a few million dollars in a Series C round late next year, Dines says.
Network Traffic Cop
Whether the company actually will have to look for more venture money down the road will largely depend on market acceptance of its product, a chip designed to manage data, voice and video traffic over the metro optical network, the access portion of core networks and enterprise networks at the wide area network (WAN) edge.
The fundamental problem Azanda attempts to address is quality of service issues on the network, which is the whole idea behind traffic management, Dines says. “The network demands some fairly intelligent processing to determine what packets are coming over and whether they need to be treated as data, voice or video. We’re in the thick of that,” he adds.
Another issue is that Azanda’s target customer base, original equipment manufacturers, spent large sums of money to install the boxes their service provider clients currently rely on. Two years ago, when money was free-flowing, ordering a new box was no big deal, Dines says. With service providers drastically trimming back their capital expenditures, however, they’re asking their OEM vendors to improve their existing boxes. In turn, those OEMs are turning to companies like Azanda for the latest silicon technology that will enable them to upgrade their boxes with the least amount of disruption to their clients.
To that end, while there are many companies out there producing silicon products for the overall network, few are manufacturing chips designed to manage traffic in such an “evolutionary” way, Dines explains. “Providing an evolutionary path for our customers seems to put us in a pretty unique position,” he adds.
Actually, the company’s biggest competitors are in-house engineers who have the ability to produce similar technologies for their large OEM employers. Fortunately for Azanda, Highland’s Dalton says, a majority of the large OEM vendors are beginning to see the value of outsourcing the development and manufacturing of silicon. “The big customers are the ones that are likely going to be around over the next five to 10 years, and they’re identifying this as an area that needs to be addressed,” he adds.
While manufacturing silicon would seem to be a fairly capital-intensive process, Dines says the company’s biggest expenditure is human and intellectual capital. While Azanda has hired only 58 employees to date, most of them are highly skilled, highly specialized engineers with backgrounds in the semiconductor industry.
It saves on manufacturing costs, however, by building a product in tandem with a semiconductor foundry, which then manufactures the chip in large volume and absorbs a majority of the capital expense.
When Azanda does finally close its Series B round, the company plans to use the proceeds to complete the production of its initial products, develop follow-on offerings and ramp up its sales and marketing efforts for its initial chip. If all goes as planned in customer trials, Azanda could have the first iteration of its chip in production by the fourth quarter, Dines says. The company currently is talking to large OEM players, but hasn’t officially inked any deals with them, he adds.
Robyn Kurdek can be contacted at: Robyn.Kurdek@tfn.com
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