Venture Dollars Expand Bandwidth

Demand for bandwidth is developing in tandem with broadband content, and, over the last two weeks, has crept into the private equity market. More than $100 million has poured into the fiber optic sector, scoring deals for high-speed players like AccessLan Communications Inc., OptiMight Communications Inc. and LuxN.

“Now that the technology and equipment is available, people want bandwidth,” said Maia Heymann, vice president and director of West Coast operations for BancBoston Ventures. “Everyone, businesses, are dependent on the Internet for execution. A faster connection equals faster execution.”

High-speed Internet access is a multi-step process, requiring multiple players, end-user access systems (most often through digital subscriber lines, or DSL), transmitters, amplifiers and miles of fiber optic cable to convert digital data and voice into optical signals, and then back again into digital data and voice signals.

According to DSLPrime, between 55% and 60% of the nation can now receive DSL, while 25% of the population resides in urban areas with four or more providers and intense competition. In fact, the number of DSL subscribers is expected to grow by approximately 500% during 2000, to total approximately three million subscribers. Bell Atlantic Corp. alone intends to double its coverage to reach 500,000 subscribers. SBC Communications Inc. expects to sign on one million DSL customers by year-end.

DSL equipment providers, however, might be among the biggest winners in the broadband explosion.

Access to Venture Capital

AccessLan Communications, whose technology allows end-users to connect to fiber optic networks via existing, embedded copper wires, completed a $35.1 million Series E round last week, led by a $15 million equity investment from BancBoston Ventures. Others participating in the financing included existing investors Accel Partners, Berkeley International Capital, Highland Capital, Sequoia Capital, Tudor Private Equity, The Ignite Group, NIF Ventures and Intel Corp.

Even while the public markets began to express doubt over the current high- tech boom, the latest AccessLan deal was oversubscribed, and the round could have been completely funded by its roster of existing investors.

“The market was really hitting the skids and none of the investors even flinched,” said Mike Pisterzi, chief executive with AccessLan.

Since its founding in 1997, the company has raised approximately $75 million of private equity. This latest round, however, is the company’s last as Pisterzi said any future capital will come from the public markets. The company is not yet in registration and will announce contracts with several new customers before it draws up initial public offering papers.

OptiMight Grabs $32M

For its part, OptiMight has honed in on technology that can transmit optical signals further along fiber optic networks than existing technology allows, developing a new standard for dense wave division multiplexing technology, the technology that currently extends optical signals through cable networks owned by national telecom giants like AT&T Corp. and Qwest Communications Inc. OptiMight’s equipment, the company claims, can transmit those signals up to several thousand kilometers.

The company also scored in the private equity market last week. Worldview Technology Partners led the $32 million Series B round tha also included returning investors Brentwood Capital and Venrock Associates. While the round also included traditional high-tech venture funds, including Meritech Capital Partners, Vertex Management Inc., Hook Partners and Thomas Weisel Partners LLC, also thrown into the mix of funders was the venture arm of powerhouse fiber optic player Lucent Technologies Inc.

“They’re already a powerhouse in optical networking, it’s a major stamp of approval,” said Clarel Thevenot, director of marketing with OptiMight.

Still, OptiMight’s product is not yet on the market.The latest round will carry the company through beta, to begin trials with potential customers, although the company has not signed on any customers to date.

That, Thevenot said, is not a worry. He said OptiMight is in discussion with potential customers right now, and although he could not identify any of them, the pool of potential customers is limited to existing fiber optic players, companies like Qwest or Sprint.

The company calculates that the long- distance market is worth between $5 billion to $15 billion. OptiMight is looking to capture a sizable share, indeed to grow into a multibillion-dollar company, with contracts running upwards of several hundred million dollars each. Although the company will focus on signing on customers over the next several months, OptiMight also will be spending heavily in business development and expanding its existing management team.

Over the past few years, the established providers [like] Lucent, Nortel and Alcatel have taken WDMA technology to its limits… it’s a radical change in technology and capacity – more traffic and, it can lower the carrier’s costs,” Thevenot said.

The company plans to return to the private equity market for a much bigger round, Thevenot said, in the first quarter of 2001, a deal the company will start negotiating at the end of this year.

LuxN Takes $50M, Eyes More

Interest in the fiber optic space also propelled LuxN’s $50 million Series C round beyond its original target. Azure Capital Partners, Credit Suisse First Boston Merchant Bank, E-TEK Dynamics, now part of JDS Uniphase, CommVest and Storm Ventures took a piece in the round, joining existing investors, including New Enterprise Associates US Venture Partners, Mitsubishi Corp., Mitsui & Co. and Siemens Corp.

The round, however, is incomplete. The first close, said Chief Executive Tom Alexander, totaled approximately $50 million, but may ultimately bring in as much as $70 million.

Although the company is not yet in registration, it will not be raising any more private equity before an initial public offering. The latest round of financing, Alexander said, will easily carry the company through the end of next year and will be spent on research and development, in creating evaluation units for customers and identifying and building relationships with service providers.

“The past 18 months’ adoption of Gibgabit Ethernet switches has created significant momentum for Gigabit Ethernet wide access network connections to be the next explosion of demand. LunxN’s value proposition and modular, user-friendly architecture serve these market conditions perfectly, and the company stands to be a central beneficiary of GbE WAN adoption,” said Jim Parmalee, telecom equipment analyst at CSFB.

In Active Operation

LuxN technology operates along the edge of wide access networks, converting electrical signals into optical signals that can be carried along fiber optic cable. Unlike OptiMight, LuxN is already carrying live traffic to customers like the University of Texas and some of the Las Vegas casinos. Six more customers are in the pipeline. By the end of its next fiscal year, in July 2001, the company predicts it will have between 40 and 50 customers.

Even though the average contract size ranges between $300,000 and $1 million, the company is far from profitable. Alexander said that LuxN only began shipping its product four weeks ago and the potential market is growing exponentially. According to forecasts done 18 months ago, the potential market for LuxN’s product was valued at $2 billion in 2001. Now, forecasters put that number at $8 billion.