High-speed Ethernet service providers snare cash
Published: 08 Feb 2001 15:31 GMT
Yipes Communications and Telseon, two fledgling communications service providers, have done what many startups have found difficult in recent months: they've captured the hearts of venture capitalists and corporate investors.
Substantial rounds of financing have accrued this week to the emerging service providers, which use gigabit-speed Ethernet technology to provide a direct link between the offices of their business customers and metropolitan area fiber-optic voice and data networks.
San Francisco-based Yipes received $200m on Monday from Intel, Soros Private Equity and several investment banks. Telseon, of Englewood, Colorado, followed with $100million in equity investments and an additional $75m in equipment vendor financing from, among others, the telecommunications investment arm of DLJ Merchant Banking Partners, Cabletron Systems, Foundry Networks and US Bancorp Piper Jaffray.
These hearty rounds of funding are impressive at a time when many companies are hard-pressed to attract even minimal backing. Venture capitalists are scrutinising startup investments as never before, and yet the gigabit Ethernet providers have garnered massive rounds of funding.
Some industry insiders say that, in exchange for the cash, Yipes and Telseon were forced to give up significantly more equity in their companies than executives might have hoped for in better times.
"They came close to not getting funded," said Bart Schachter, a general partner at Blueprint Ventures, which has invested in several communications companies.
In exchange for the funding, Yipes and Telseon had to surrender a stake in their companies as much as five times larger than executives originally had planned, a development that generated much lower valuations for the two companies, Schachter said. Venture capitalists now believe, he said, that if the valuations of most public companies have fallen as much as 95 percent from their 52-week highs, then private companies also should be down comparably, if not more.
"But when the price became right, everybody jumped in," Schachter said. "And it was at a fraction of what [company executives] expected."
Telseon executives declined to comment on their valuation.
"It's an incredibly tough market right now," said Vesna Swartz, vice president of marketing for Telseon. "The fact that we were able to get this financing is a testament to two things: We have a strong technology differentiation with our proprietary software... and we have an incredibly focused, almost militarylike ability to execute."
Regardless, many industry observers have speculated for some time now that venture capitalists and corporate investors will bet on fewer companies, giving them larger rounds of financing as more investors bestow cash upon the strongest start-ups.
Yipes and Telseon have been busy building their networks, both companies serve 20 of the nation's largest cities, and they have signed partnership pacts with significant carriers. For example, Telseon has resale deals with 360networks and Level 3 Communications.
"There's something to the low cost of Ethernet equipment. For data or Internet access, they can offer more bandwidth and at a lower cost than, say, a T1 or T3 [connection]," said Shin Umeda, an optical industry analyst at the Dell'Oro Group, a networking market research and consulting firm. "And a lot of it has to do with them being already established and early to market. They are well along."
Yipes and Telseon "were earliest to market, and they were able to build their infrastructure and business models early", Umeda said.
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