The incubator model has become more or less a dying breed in the wake of last year’s Nasdaq tech wreck, but one place where it seems to be still alive and kicking is inside Lucent Technologies’ Bell Labs.
Within the past two years, Lucent’s in-house think tank has spawned approximately 30 spin-off companies, which have netted more than $375 million in venture capital from internal and outside sources thanks to the telecom giant’s New Ventures Group (NVG). Not to be confused with Lucent’s corporate venture arm, called Lucent Venture Partners, NVG doesn’t back any companies conceived outside of Bell Labs.
Its latest progeny is Monroe Township, N.J.-based AraLight Inc., which managed to land on a $10 million venture capital cushion. An optical networking play founded last September, AraLight’s high-bandwidth optoelectronics chip technology helps more efficiently convert analog optical signals to digital electronic ones along Internet switches.
Signal Lake and Ridgewood Capital co-led the Series A deal, although Signal Lake put in slightly more capital. Along with Lucent, Solar Venture Partners also signed on with a $1 million contribution.
Joerg Sperling and Bart Stuck, managing directors with Ridgewood Capital and Signal Lake, respectively, and Steve Socolof, vice president of Lucent’s New Ventures Group, all took seats on AraLight’s board of directors as part of the financing.
The transaction actually closed late last year after being in the market for just two months, but Ridgewood Capital’s Sperling said the announcement was held up because AraLight had to first work out some intellectual property and patenting kinks with Lucent before becoming an independent company.
“Under current market conditions, IPOs are fairly limited and will remain fairly limited for the rest of the year,” he said. “So a strategic sale of this business is probably going to be a viable exit for us. [To that end], it was important that the company’s legal structure was set up in such a way that, pretty much the day after the close [of the round], a Nortel Networks or another Lucent competitor could look at it and say, This is all clean, the intellectual property is all clean.’ We didn’t want too many strings attached to Lucent.”
AraLight hasn’t received any acquisition offers yet, he added.
VC Spin Doctors
Sperling said that Ridgewood Capital issued the initial funding announcement instead of Lucent because “it’s not just a Lucent story. We wanted to avoid the risk of Lucent using the spinout for its own benefit to create positive PR, which it so desperately needs right now.” Lucent has since put out its own release regarding the deal on its Web site, extolling the virtues of its latest technological protegee.
To be sure, however, Murray Hill, N.J.-based Lucent certainly has had its share of woes recently as the telecom sector has taken a thrashing along with most tech-oriented stocks on Wall Street as technology sales dip well below last year’s dazzling levels and the stock markets continue their dramatic decline. The company claims it was in line with analysts’ expectations,
Lucent also recently posted a pro forma loss of $1.02 billion, or a basic and diluted loss per share of 30 cents for the first fiscal quarter ended Dec. 31, 2000. At the same time, it announced a massive restructuring plan designed to cut costs in excess of $2 billion. Lucent was trading at a price of $11.09 per share at market close last Thursday.
Lucent’s troubles don’t seem to be spilling over onto AraLight, however, as the now-independent start-up is expected to grab another round of venture financing sometime in May or June, and has already garnered a wealth of VC interest, Sperling said. To that end, it may actually end up doing the offering a bit earlier, he added.
“We could wait, because the company has enough money to last it until early next year, but in the current market, it’s best to raise money when you can, not when you need it,” he noted.
For now, AraLight intends to tap its capital reserves to build its own facility, double its headcount to 48 by summer and lease more equipment in order to prepare to ship the beta version of its product to a select group of customers within the next two months. The testing should be done and a viable product ready to go out the door by this fall, Sperling said. Although the company hasn’t inked any customer contracts just yet, it plans to target such telecom and optical industry heavyweights as Nortel, Sycamore, Cisco, and even Lucent.
Ridgewood Capital isn’t a newcomer to Lucent’s spinout club, as the VC firm previously invested in a wireless play called Savaje Technologies. It came to the table with AraLight, however, because it represented a solid fit with Ridgewood’s existing optical networking portfolio, which now includes about seven companies. “There’s no overlap – we’ve never funded competitors [within the portfolio],” Sperling said. “The companies do business with one another, and there are two companies in the portfolio that could be potential AraLight customers.”
Robyn Kurdek can be contacted at Story Feedback.