Just as investors lost interest in B2C companies earlier this year, they are shunning startup manufacturers of optical networking gear; especially DWDM products aimed at metropolitan markets.
Venture funds are more selective today than they were 12 to 18 months ago when "anything with optical in its name got funded overnight," said Steve Diamond, a general partner of The Sprout Group. "There are a lot of deals circulating that are having a tough time getting funded and valuations have dropped as much as 50 percent from earlier rounds."
Chris DePuy, a general partner with Bowman Capital, said that the fundamentals of the industry have changed because carriers are having funding problems and so cannot buy equipment. He said that component and equipment vendors are not getting the price that they expected in second and third rounds of financing but that he has not seen valuations cut in half. "This is the first time in two years that you are seeing that (in the optical area)," he said.
"In the B2C market you saw a lot funding of new ideas that were worth testing, and a year later you realized which ones were good," said Jim McLean, a general partner of ComVentures, Palo Alto. "You see a lot of that with the optical companies. It is a relatively new technology and there are a lot of good ideas."
ComVentures, which specializes in network infrastructure companies, is still aggressively doing first round investing in new companies, but there has been a slow down in mezzanine or later stage financing, McLean said.
Mezzanine financing is based on the public equity market and that is "a slippery slope," McLean said, adding that no one knows how initial stock offerings will fare so bankers do not know how to price a deal. "A lot of guys are sitting on the sidelines. A deal that looks good one week could look terrible the next," McLean said.
Diamond does not see much hope from the stock market. "The IPO market is virtually shut right now. That could change on a day-to-day basis." It opened a bit last week when one company, component supplier Alliance Fiber Optic Products, sold 4.5 million shares at US$11 each, the bottom of the range - which had been reduced from 6.25 million. Alliance Fiber opened at US$11 Tuesday, rose to US$11.13 and then sagged to US$10.13, giving graphic evidence how weak is the demand for optical companies
The rug was pulled out from the optical market when Nortel Networks reported disappointing financial results in October, said Adam Green of TL Ventures. Nortel's stock fell from US$65 to US$48 overnight and has since fallen to US$38 last week.
Manufacturers of metropolitan DWDM systems are finding investors are more skeptical today than a year ago because there are so many competitors with similar products, Green said.
Dell'Oro Group rained some more on the optical parade last week by reporting a 7 percent decline in sales of DWDM and Sonet/SDH gear to US$5.5 billion in the third quarter. Only the metropolitan DWDM market grew, increasing 37 percent to US$108 million, Dell'Oro said. McLean noted that that is too small a market to support all the companies with metropolitan DWDM gear.
There are at least six optical component or system companies lined up to do IPOs. Cidra was set last week to sell 6.7 million at US$14 to US$16, and Wavesplitter Technologies has scheduled a 10 million share offering for US$9 to US$11 per share. They are component manufacturers. Tellium, a manufacturer of optical cross connects, intends to sell 17.5 million for US$13 to US$15.
OMM, a switching subsystem supplier, has filed to sell 9 million shares at a price between US$10 and US$12 per share. ILX Lightwave want to sell 5 million shares at estimated range of US$15 to US$17, and Optical Access, an optical wireless products has an offering of 5 million at US$11 to US$13 per share on tap.
