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VCs Eyeing Series A Offer For IRIS Group

Although the optical networking industry is becoming somewhat saturated with private equity money these days, it seems that, for now, VCs remain willing to reach deep into their pockets and share the wealth. Still, for companies vying for funding in that sector, the more novel the concept, the better.

The IRIS Group is among the latest crop of big-idea innovators to score VC dollars. In typical entrepreneurial fashion, the newly established consortium of four optical networking start-ups – Iris Labs, Metera Networks, Latus Lightworks and Coree Networks – has banded together to overhaul the existing technology and re-design the architecture and components of the optical network from scratch.

Hoping to capitalize on the co-start-up collaboration, the IRIS Group plans to provide telecommunications carriers the means to build a complete, end-to-end optical network.

Its business model is as innovative as its charge. Each company, which was created specifically for the collaboration, operates as a legally independent entity, with its own corporate and financial structure.

“This framework carves the technology into sizeable pieces start-ups can handle,” said Michael Zadikian, IRIS Labs’ co-founder and chief executive. “Carriers often complain that there is no end-to-end network management solution available from a single source. The IRIS Group intends to create an effective way to deliver lower-cost data services with unprecedented scalability and management capabilities, that can be sold in parts, or as a whole package.”

Greater Than the Sum of Its Parts?

Although it isn’t set up like a traditional incubator, IRIS Labs, based in Plano, Texas, will define the overall architecture and network management strategy and provide operational assistance, such as human resources and legal expertise, to the daughter companies.

The other charter members, including Richardson, Texas-based Metera and Latus, will develop metro-area optical systems and long-haul optical backbone technology, respectively; and Coree, based in Tinton Falls, N.J., will concentrate on core optical networking products.

“Other companies in the optical networking space are pursuing the current wave right now,” Zadikian said. “It’s like following a hockey puck – everyone runs to where it is today. The trick is to figure out where it’s going to be tomorrow and go there. That’s the mission of the IRIS Group – to anticipate the next wave, or create it.”

Zadikian remained mum on details regarding the IRIS Group’s optical networking technology, but he did reveal that broadband access, digital subscriber lines and cable weren’t on the radar screen.

He also said that the group hopes to market its products to large-scale carriers like AT&T and MCI Worldcom.

VCs Say It’s A Viable Vision

Cynics might say that the IRIS Group vision, though bold, is somewhat idealistic.

Apparently investors disagree three of the four upstarts have already raised almost $60 million in separate first-round funding since they set up shop earlier this year. Menlo Park, Calif.-based Mayfield Fund led the Series A Round, and was joined by Hook Partners, Sevin Rosen Funds and Weiss, Peck & Greer Venture Partners.

All of the investors obtained board seats, except Hook Partners.

Coree, the youngest of the start-ups, is expected to close its first round of financing within the next two months. According to a press release from the IRIS Group, the collaboration’s total venture capital commitments are slated to reach $100 million by the end of the year, but Todd Brooks, a general partner with the Mayfield Fund, estimated that Coree’s first-round funding will come in at about $20 million, bringing the total investments in IRIS Group to about $80 million.

The same investors will likely participate in Coree’s Series A Round, Brooks added.

“We weren’t required to invest in each company, but we chose to because the goal is to have as much alignment and commonality among the investors and management as possible,” Brooks said. “We have a rare, but natural motivation to want all of the companies to succeed. Single entities haven’t been able to solve the problems plaguing the industry on their own. The IRIS Group’s collaborative solution is a viable vision.”

It seems the participating VCs weren’t the only ones who thought so. According to Brooks, the collaboration had to turn investors away, but the competition substantially raised the companies’ individual valuations, which have not been disclosed.

The management team, investors and employees get an equity stake in each of the companies within the IRIS Group. Although the exact breakdown of ownership hasn’t been disclosed, Brooks did comment that the management team’s slice could come out to roughly more than 50% or 60% post-money.

Under that structure, which Zadikian calls a “virtual fund model,” the IRIS Group’s management pre-negotiates its shares and works with investors to capitalize the companies, and the financing goes directly from the VC to the company being funded. And if a new company is initiated into the collaboration, a move Zadikian said isn’t likely in the immediate future, the investors will automatically own a piece of it.

While it isn’t seeking additional business partners just yet, the IRIS Group will probably look for another round of venture capital within the next year, Zadikian said. He added that its fund-raising target for the Series B could be as much as $300 million.

In the meantime, the quartet will use proceeds from the Series A round to increase headcount and continue equipment and product development. If all goes as planned, the IRIS Group will begin product testing with selected customers by the second half of 2001, and could be ready to bring its products to market by mid- to late 2002.