NGN Ventures puts promising startups under its microscope

By Robert Pease

As each telecommunications success story establishes new benchmarks for making things bigger, faster, cheaper, and more durable, startup companies are rising to the occasion. New companies with new ideas are springing up overnight with promises of changing the communications world as we know it. Some do. Most do not.

To help define the landscape of the high-performance networking business, the Next Generation Network (NGN) Ventures annual executive conference was held recently in Burlingame, CA. The conference, chaired by Dr. John M. McQuillan, president of McQuillan Ventures, highlights the up-and-coming leaders of tomorrow in network ventures.

In its second year, NGN Ventures 2000 showcased its "Class of 2000," comprised of some of the most promising new entrants in what the conference organizers identified as the 12 hottest areas of the Internet explosion. In the optical area, particularly the metropolitan segment, companies like Corvis Corp. (Columbia, MD), Redback Networks Inc. (Sunnyvale, CA), Tenor Networks, (Acton, MA), Alidian Networks Inc. (Moun tain View, CA), and Astral Point Communications Inc. (Chelms ford, MA) are among those expected to make a splash with new-product introductions. In fact, the buzz around telecommunications these days seems to be that if it involves anything optical, there is venture capital (VC) readily available. It may not be quite that easy, but optical networking is certainly in the spotlight for VC companies like McQuillan Ventures.

"We are witnessing a critical moment in our industry," says McQuillan. "There are more startups than ever before. We [McQuillan Ventures] are struck by the speed with which telecom startups are able to achieve success today and the degree to which they are successful within such a short period of time."

McQuillan says new companies are reaching success in months rather than years. "Success" today equates to first-year sales of $100 million with market caps of more than $1 billion. In his opening address at NGN Ventures, McQuillan drew comparisons between 1998, considered "ancient history" by today's standards, and expectations for 2000.

In 1998, for instance, when a company failed, it faced bankruptcy, losing all its money. Today, however, failure is likely associated with a company that sells out for less than $100 million. If a company sold for $100 million after four years in 1998, it was considered moderately successful. But modest success today is defined as a company having a $400-million price tag after just 18 months. In fact, the biggest success stories of today are startups that hit a $20-billion public market cap in just six months from IPO. The NASDAQ's recent volatility notwithstanding, the success bar has been raised substantially in just a two-year window.

Of 44 total startup companies in last year's NGN Venture's Class of '99, 19 companies have been ac quired, 10 have gone public, and 15 remain private, including four in registration. Before the NASDAQ's correction in the 1st quarter, their total combined market cap was an astounding $108 billion.

"The acceleration of product development cycles, huge infusion of VC dollars, favorable business and regulatory environment, and proliferation of service-provider customers for new products are all factors in this virtual cycle," says McQuillan.

Some trends worth noting in the optical-networking space include the hot access market. Venture capitalists are bullish on the use of both passive optical networking and Gigabit Ethernet to overcome traditional bandwidth bottlenecks and bring higher-speed connectivity to a broader spectrum of business customers-at a much lower price.

"In the metro space, we've seen an explosion of venture-backed solutions providers, both those supporting and improving SONET and those aiming to out and out replace it," says McQuillan. "What's truly exciting from our perspective is the prospect of having a whole new set of service providers exploiting these new firms' optical architectures to deliver infinitely more flexible and economical high-speed offerings. Many 'pure' optical solutions are emerging in this area that bear watching."

Another optical trend is to provide business customers with on-demand bandwidth. Venture capitalists like McQuillan are eager to see how the marketplace responds to the challenge of delivering lambdas on demand. An interesting piece of the puzzle will be whether major vendors accept and comply with the efforts underway as part of the Optical Domain Service Interconnect (ODSI) initiative (see Lightwave, March 2000, page 1).

Although McQuillan is hesitant to try and summarize the prospects for success with the Class of 2000 startup companies-and rightly so, considering the enormity of the change that's occurred in just a few years-he looks ahead with a good degree of confidence.

"We are confident that many of the startups we featured in this year's program will be key deliverers of change in our industry over the next 12 to 24 months," says McQuillan. "A number of those we invited who were privately held, independent companies at the point we selected them to participate, have already been acquired. Others are now in registration. So we can congratulate ourselves on having picked 'winners.'"

McQuillan Ventures reviews hundreds of business plans and proposals in choosing candidates who are most likely to succeed. The firm works with leading VCs and asks each for the "pick of their litters." The key, says McQuillan, is in finding startups with strong management teams in fast-growing, vital areas with the potential to change the telecom landscape dramatically.

NGN Ventures is co-produced annually by Business Communications Review and McQuillan Ventures. The 2001 conference is scheduled for April 17-19 in Burlingame. With several startup companies undergoing IPO registration and at least six being acquired, McQuillan's Class of 2000 has already started soaring.