Hatteras Networks Passes $45M Test

Two years ago, when the CLECs and ILEC s were locked in battle for headway into the high-speed data market, Hatteras Networks was founded to develop a system to make the carriers’ copper networks more efficient for the deployment of data Ethernet services. The industry has since collapsed, but Hatteras, based in Research Triangle Park, N.C. has survived: It is slated to begin beta tests with network carriers in the fall and closed on a $45 million round of venture funding.

Grotech Capital Group led the Series C round, with pro rata participation from prior backers Bessemer Venture Partners, ComVentures and Columbia Capital. The three repeat buyers had pumped $28 million of venture capital in two previous rounds of funding that date back to the company’s founding in July 2000. This latest funding, however, is slated to be the company’s last.

“The thinking behind the investment was that we didn’t want to have to revisit the deal in 12 months and to [raise enough capital] to support the company in a way that takes the company through stages to be on our own,” says Hatteras President and CEO Thomas McPherson. The $45 million is expected to sustain the company’s operations until 2005, at which point it is expected to already be cash-flow positive mark.

“It’s enough capital to allow them to weather this storm without having to go out and raise money again,” says Joseph Zell, a Grotech general partner and new Hatteras board member. “If you’re a startup and selling to carriers, that’s already a black mark against you. But if you can say, I really am fully funded,’ that’s a plus in the business plan.”

Hatteras makes a box that will sit on carriers’ networks, whether they are copper phone lines or fiber optic cable. It is scheduled to begin beta testing with carriers in North America, Asia and Europe in the fall, and the company hopes to begin shipping its technology in 2003. Although it has not named any of its customers, the company is targeting facilities-based carriers like SBC or Verizon.

Hatteras’ technology, says Grotech’s Zell, provides a low-cost architecture for metro Ethernet deployment – a technology that carriers are still willing to invest in despite the industry-wide drop in capital expenditures. “The RBOCs and ILECc are still spending money, but they’re going to prioritize their spending into areas that give them the most immediate returns,” he says. “What carriers love is a technology sold into their existing base and existing networks and represents and low-resistance source of new revenue.”

With 60 employees on its roster, the company plans to add a small sales and marketing force to its team as it prepares to roll out its technology. The bulk of this round of funding will be used for working capital and to forge partnerships with incumbent suppliers.

Contact Carolina Braunschweig