Euro VC hit less than US

Investment in optical-networking start-ups has fallen 50-70% over the last two years as venture capital (VC) firms have become more discriminating.

"VCs don't want to be alone in a deal. They want to see strong syndicates and multiple investors," says Bill Cadogan, general partner at St Paul Venture Capital (Minneapolis), of the US scene. "They need a few other players around the table that can stitch together an inside round, if necessary, to keep a company going."

The optical sector is more entrenched than ever before, and they are targeting money at "here and now" products that address the ILECs' pain points. The "paradigm changing" companies that were touting the birth of bleeding-edge technologies, like all-optical switching and convergence onto an all-IP network, are struggling to get funding.

Investment in Europe is also suffering, though not as severely. "They never really saw the irrational exuberance that we saw here in the US," says Cadogan. However, the optical market has still slowed and the number of funded deals decreased.

"Optical communications is a global business," says Everardo Ruiz, senior manager for strategic investments in optical and wireless at Intel Capital. "VC has returned to a more reasonable, normal time where doing solid due diligence is an integral part of the process."

Both Cadogan and Ruiz agree that the key is a strong management team, with three concepts: technology must focus on solving a real "hot button" from the customer while using existing infrastructure; the company must demonstrate financial control of its spend rate; the product must be advanced enough so that customers react to it.

Some market researchers suggest an economic resurgence in about two years. Technologies expected to lead the way include Gigabit Ethernet, tunable technologies, semiconductor-based components, and software, as ILECs look to reduce capital expenditure and, via provisioning efficiency, operating expenditure.

VCs are still interested in investing but not until due diligence has been satisfied. "I think this is a great time to invest in solid teams and real revenue companies at very attractive valuations," says Ruiz.

More in Companies