Phaethon Tunes Up $22 Million Second Round

Citing the increasingly popular refrain that its products can solve a problem that others are only able to manage, Phaethon Communications recently raised $22.1 million in its second round of venture capital financing. The Fremont, Calif.-based firm, which focuses on reducing optical dispersion, had previously secured $7 million in January of 2000.

Goldman Sachs & Co. led the Series B deal by investing approximately $7.4 million and setting terms that eventually led to a $112 million post-money valuation. Cisco Systems Inc. also provided around $7.4 million, while existing backers Mohr, Davidow Ventures and The Photonics Fund filled out the round.

“Goldman obviously brings us great industry contacts, while Cisco will help us better understand what types of problems people developing these next-generation optical networks are running into,” said Gary Cuccio, chief executive and president of Phaethon.

The primary problem Cuccio and his team are currently concerned with is dispersion, or the degradation of optical signals as they traverse fiber. There are currently a number of solutions on the market, but they are mostly static without the ability to tune out dispersion for a specific channel.

“These guys have a low loss, small form factor, tunable solution which is obviously appealing for service providers and manufacturers looking to create dynamic reconfigurable mesh networks,” said Joe DiSabato, a managing director with Goldman Sachs.

Phaethon expects to complete its self-tuning prototypes in the third quarter, although it will take significantly longer to push the product to market. In the meantime, the third quarter will also witness the market introduction of both manually-tunable and remotely-tunable products.

“It?s not just that Phaethon?s solution is tunable, but also that it?s eminently manufacturable,” said Jim Smith, an associate with Mohr, Davidow Ventures. “It?s an elegant technology without hundreds of moving parts.”

The amount of product the company ends up manufacturing will not only have a direct impact on its revenue stream, but will also determine whether or not another round of venture capital financing is in the cards. If orders come in at a rapid rate, then the company may need to raise a Series C round in order to help increase and accelerate product development.

Dan Primack can be contacted at Story Feedback.