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On March 18, 2002, Polaris Networks, a developer of next-generation
optical transport switching systems, announced
the completion of $52 million in new venture funding. This is the
company's second round following its Series A completion back in August 2000
-- a time when technology was still in its boom and start-up valuations were
soaring. Ray Kao, CEO and CTO of Polaris Networks, describes how he was able
to close this new round of funding during a time when the technology sector
suffered the biggest setback of a weakened economy.
Impact Of Market Downturn
From 1998 to late 2000 the optical networking sector of the telecom
market experienced tremendous growth. Service providers were racing to
expand their networks in preparation for the broadband service revolution.
Capital expenditure had accelerated and, as a result, optical network
equipment suppliers (both public and private) were enjoying inflated growth
projections and valuations.
During this period, venture capital fundraising was all about the
technology "buzz." VC's were eager to invest in any venture
associated with fiber optics. Polaris, having secured a Series A round in
August 2000, also enjoyed riding the technology wave. The company managed to
close it in a matter of days with highly favorable terms -- no need for a
business or financial plan. A sexy technology story was sufficient.
In 2001 the market took a downturn, further heightened by the tragic
events of September 11. The sobering impact of the broadband era not
materializing resulted in the entire sector suffering the consequences of
over spending, surplus network build-out, and plummeting valuations. The
optical start-up world was particularly hard hit. Consequently today,
attracting new investment has become a start-up's biggest business
challenge.
Raising Money In The New Economy
In today's economy, VC firms have considerably scaled back investment to
the point where many optical companies are receiving either 'wash-out'
rounds or no funding at all. In sharp contrast to the bubble days, VCs now
perform extensive due diligence on a company and the fundraising process
can take many months. Following are some of the key areas of due diligence a
company should expect from a VC firm:
- Customer traction: the highest priority for VCs, as their focus
turns from technology to a company's ability to generate sustainable
revenue, is customer traction with commitments to early trials. VCs
expect to speak directly to potential customers to validate endorsement.
- Team to execute: the team's ability to execute is critical to
the success of the company. Having a good business plan is worthless
unless you have the right team to deliver. Investors look for teams with
a proven track record and extensive R&D expertise, led by executives
who bring many years of relevant experience.
- Market positioning and uniqueness: based on solid financials,
the company's business plan should clearly define the company's
strategy, market opportunity, and target customers.
- Technology: investors look for new cutting-edge technology that
will offer significant price-performance benefits. However, they will
also assess technology and application risks, and determine whether the
development schedule is realistic to meet the window of opportunity.
Today, investors are more cautious about investing in 'bleeding-edge'
technologies that present higher risks.
- Financial plan: while good financial plans have always been
required, today, they are highly scrutinized. For example, early stage
start-ups can no longer hire aggressively in hopes of boosting their
valuations. Investors are attracted only to those companies that operate
with minimal resources and closely manage costs. A good financial plan
will provide balance between revenues and business expansion.
Closing A Successful Round
At the outset, Polaris identified its target market as the metropolitan
(metro) network - more specifically, the metro core. This focus has become
the most important segment of the public network, as service providers
focus, more than ever, on maximizing their revenue potential. Functioning as
the critical bridge between the access and long-haul segments, metro
networks are challenged to adapt to a highly dynamic set of service provider
requirements: "build to demand, not to forecast." Over the last
two years, the paradigm shift from pre-provisioned to just-in-time bandwidth
has exposed the metro network inefficiencies and complexities.
Polaris addressed service provider
requirements that have been underserved for almost a decade by current
market solutions -- requirements that are becoming extremely painful from an
economic and operational standpoint. Service providers will only consider
value propositions that offer 10X or 20X-type improvements over their
existing base. We offer the
alternative solution to incumbent suppliers whose aging technology does not
meet today's requirements. In summary, by delivering the right product at
the right time we are presented with a tremendous market opportunity and
have the right team to deliver.
This new round of investment is led by Advanced Technology Ventures
(ATV), a tier one VC firm who joins Polaris's existing investors Redpoint
Ventures, Venrock Associates, and SToRM Ventures. This new round is expected
to last through product delivery, certification, and initial revenues.
Currently, Polaris is very pleased with their current financial status and
is happy to report that they are solidly on track.
Ray Kao is the founder, CEO, and CTO of Polaris Technologies. Polaris
Networks develops next-generation optical transport switching systems
for metro core networks.
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