Innovance Sticks With Tradition, Asks Strategic Investors To Hold Off

Holding firm in its decision to preclude interested strategic investors from participating in its second round of venture capital financing, Innovance Networks recently managed to net $75 million from a syndicate of private equity firms known for their industry expertise.

Morgenthaler Ventures and Thomas Weisel Partners co-led the transaction and each received a board seat with the Piscataway, N.J.-based optical networking company. Menlo Park, Calif.’s Morgenthaler has carved out a name for itself in the communications technology sector with stakes in companies like laser maker Agility Communications and components manufacturer Lightwave Microsystems. San Francisco-based Thomas Weisel, on the other hand, has concentrated almost 30% of its $1.3 billion portfolio in communications equipment and infrastructure software companies such as Convergent Networks Inc. and Luminous Networks Inc.

Additional participants in the Series B deal included Banc of America and KPL Ventures, a fund backed by former JDS Uniphase Chief Executive Kevin Kalkhoven. Azure Capital Partners, which seeded Innovance with a $20 million investment in May, maintained its pro rata position.

“Each of these partners brought something unique – contacts within the industry or expertise to develop an ecosystem of components or how to bring the company to market,” said Wayne Edmunds, chief financial officer with Innovance.

Wait Two Years

Strategic investors – optical components suppliers, for example – were noticeably absent from the deal. The round was oversubscribed, and the company eliminated all strategic backers from the bidding.

“We postponed any decision on strategic investors to allow the product to develop a little bit and to avoid natural conflicts,” Edmunds said. “It would have been difficult to leave someone out. We agreed to reevaluate for the next round of financing.”

Those investors, however, may have a while to wait. With $95 million of venture backing, the company is capitalized through an expected 2002 product launch. Edmunds said the company would not dip back into the private equity markets before that event.

For 2001, the company expects to complete the build-out of its research and engineering teams in Piscataway and Ottawa, Canada, to complete development work before the product goes to market. Before 2002, the company will have completed a proof-of-concept trial and have begun lab tests with at least one or two potential customers.

Customers for this developer of transport equipment for core applications include interexchange carriers with large-scale bandwidth needs, delivering photonic bandwidth solutions for global backbone and regional network service providers.