In a move that won’t likely come as a shock to anyone who’s been remotely tuned in to the fallout plaguing the telecommunications sector over the past 18 months, metro Gigabit Ethernet provider Yipes Communications Inc. announced late last month that it filed for Chapter 11 bankruptcy protection.
Facing pressure from its creditors, the latest victim of the long nuclear telecom winter will seek to renegotiate its contract obligations in fiber infrastructure and real estate for agreements that reflect current market conditions and prices vs. the astronomical terms it negotiated a few years ago during the tech boom.
Additionally, Yipes has secured an undisclosed amount of debtor-in-possession financing from existing majority venture shareholders in order to keep its operations up and running and its creditors at bay while it reorganizes. To date, the San Francisco-based company has raised approximately $291 million from the likes of New Enterprise Associates, Focus Ventures, BancBoston Capital and the Sprout Group.
It’s not quite clear where all of that money has disappeared to, however. In fact, Yipes was in the midst of raising another hefty round of venture financing – the company has said it would take at least another $100 million to fully fund its business plan – when it decided along with its investors to put the brakes on and get its financial affairs in order. Yipes’ existing backers are expected to pour additional venture dollars into the company if and when it gets back on its feet, says a source familiar with the situation.
“Our investors still believe in the viability of Yipes,” he adds. “But before they pumped more money in, they wanted us get our cost structure realigned with our current asset values. We can’t have overhang that reflects a different era.”
Incidentally, the VCs’ stock isn’t likely to be worth much as Yipes fumbles through Chapter 11, bankruptcy lawyers say. “Most of the time, when a company is in bankruptcy, it can’t pay its creditors,” says Jeff Wolf, a Boston-based bankruptcy attorney who is of counsel with Greenberg Traurig LLP. “If they can’t get paid in full, the stock is, by definition, worthless. Creditors get paid before equity holders.”
Most of Yipes’ VCs were mum on the subject, but one who spoke on condition of anonymity said he thinks it’s a shame the company had to file for bankruptcy.
“Customers loved these guys, but the product they offered was new to the market,” the investor says. “It takes time to get new service offerings like this out, and they probably didn’t get the take they needed in the time they had to do it. Also, with the economy, customers have gotten scared, and so perhaps they decided to stick with traditional service providers and hold off on upgrading [their technology].”
It’s certainly harder to attract customers than it was a year ago, and Yipes isn’t the only metro ethernet service provider feeling the pain. Rival Sigma Networks recently went out of business, and Metromedia Fiber Network also has indicated that it is entertaining a bankruptcy move, according to published reports.
As for Yipes, it seems, at least for now, its investors are still cautiously bullish on the company. But as to the ultimate outcome for the onetime Gig-E poster child, all we can say is, gentleman, place your bets.