There's still money out there

May 1, 2001

Having watched Wall Street pummel the optical communications industry for the last few months, a recent press release caught my attention. CityNet Telecommunications Inc. (Silver Spring, MD), a fiber infrastructure provider, has just closed its second round of funding. Since some have cited a shortage of outside capital as a cause of the rapid decrease in carrier spending, I was curious how someone managed to attract $275 million in the current environment.

CityNet installs dark fiber infrastructure all the way to the building, then sells the fiber to carriers and other users of fiber-optic plant. The company has rings underway in Indianapolis, Albuquerque, NM, and Omaha, NE, with a European city expected to join the company's roster soon. As reported in a cover story in our February 2001 issue, CityNet uses a robotic device to string fiber through sewer systems.

Founded in 1999, the company secured its opening round of funding in April 2000. The environment this time around certainly felt different, reported Debra Hoopes, a CityNet co-founder who serves as senior vice president and chief financial officer. While noting that she was not fully involved with the company the first time around, Hoopes said perhaps there currently aren't quite as many venture capitalists shopping for equity-and certainly those willing to part with a few bucks perform a lot more due diligence these days.

To find likely backers, Hoopes turned to the company's first-round funders, who put them in touch with potential new investors. CityNet also worked with an advisor and contacted companies that had expressed interest during the first funding round.

Hoopes reported that the word "telecommunications" isn't poison in the market, but it doesn't necessarily open doors, either. "I think it's a very individual matter, from one group to the next, as to how much they already have in telecom and how much more money they need to put into these existing companies or whether they're still in a position to make new investments," she said. "For the ones who are still investing in telecom, it's about looking for the right opportunity."

Hoopes believes three factors helped CityNet convince the financial market that it represents "the right opportunity." First, she said, fiber in the access space is an underserved market. Second, the company's ability to wire a city without tearing up the streets provided a compelling story and a competitive advantage. Third, the company met the general criterion of a strong management team that promises to successfully implement CityNet's business plan.

Despite impressions to the contrary, last year's financial rain forest hasn't become a desert, according to Hoopes. "There's still money out there-the money hasn't all gone away," she claimed. "They're just being much more careful."

A unique business plan that clearly spells out the marketplace, demand, and company's competitive advantage represents the cornerstone of any strategy to win over "careful" investors, Hoopes concluded. This statement reinforces the notion expressed before in this space that the era of funding a "neat" idea has passed. Companies must show a clear path from their promising technology or service to customer benefit and resulting revenues. In this context, demonstrating "time to reality" will prove essential for young companies.

Stephen M. Hardy
Editorial Director and Associate Publisher
[email protected]