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Equity Notes: Continuum bides its time to shine in optical space

07/22/2002 08:24 AM
By

What are Prism Venture Partners and Flagship Ventures thinking?

Along with Harris & Harris, these firms recently invested $14 million in a Billerica optical switching startup called Continuum Photonics.

“Believe me,” said Robert Fleming, a founding general partner at Prism, “the last thing I was thinking at the beginning of this year was, ‘Boy, I’d sure like to find a great optical switch team.’ But I couldn’t find a reason to turn them down. They just answered all my questions.”

“Optical telecom” is to 2002 what “dot-com” was to 2001 — a real door-slammer of a phrase for VCs. The optical companies that aren’t going out of business entirely are cutting their workforces to the bone, leaving just a skeleton crew to steer the company through the maelstrom.

Sycamore Networks, for example, cut one-third of its workforce last month (about 235 people), eliminated two product lines and, in a recent analyst call, said that sales for the current quarter may amount to as little as $5 million.

With $900 million in the bank, Sycamore hopes it can hang on until carriers begin buying optical equipment again. But when will that day come? Most analysts say not until 2004 at the earliest, though a few optimists peg buying to begin in late 2003.

That’s a long time to wait for revenue, especially for companies not as well funded as Sycamore.

But the brains behind Continuum Photonics believe that their timing is right. By the time their product is ready to ship in the second half of 2003, Continuum believes, big equipment makers will be buying subsystems to manufacture gear for the returning carriers.

And if they’re wrong? They’ll tough it out. Continuum has already proved it can do a lot with the equivalent of venture capital pocket change.

Before it started making optical switch subsystems, Continuum designed an electric tennis racket and licensed its technology to military and aerospace customers.

Unsurprisingly, high tech tennis didn’t get many VCs excited. Except, that is, for the Massachusetts Technology Development Corp. (MTDC), a quasi-public investment company with a reputation for finding gems in companies that none of the big private VC firms would touch.

MTDC, along with Gainesborough LLC and individual investors, supplied $1.7 million in late 2000 (the prior investors came back for more in the second round).

With both equity cash and licensing revenue from earlier products, the company was able to build a working prototype of its subsystem.

Now that Continuum has an extra $14 million on hand, the 35-employee company can build larger prototypes, get them in the hands of potential customers and — cross your fingers — close a couple of sales.

“This is the first (optical switch) company we’ve seen to hit the loss numbers and the price point at which people want to see to make optical switching cost effective,” Fleming said. “So we took the plunge.”

Continuum won’t sell directly to carriers but instead plans to go after incumbent equipment manufacturers such as Nortel Networks or Lucent Technologies, who would use Continuum’s subsystems in their own gear.

Continuum isn’t revealing details of its tech. But chief executive Jeffrey Farmer was willing to give a broad-brush version.

The company is using a ceramic material made of lead zirconate titanate that shrinks and expands when an electric charge is applied. Add in silicon micromachines and the result is an inexpensive optical subsystem with very low data loss.

Nevertheless, the depressing state of telecommunications has deep-sixed plenty of whiz-bang technology companies. Indeed, the market was the biggest hurdle for Flagship, said managing director Stephen Ricci.

After watching the company for a number of months, however, he decided that its technology is flexible enough to survive by selling it into niche markets until the broader telecom market recovers.

Despite this recent funding, both Fleming and Ricci say they’re unlikely to make any more optical investments in the near-term.

“The hurdle is very high,” Ricci said. “It takes a combination of dramatic cost and performance impact on the end-customer to even get much consideration at this point.”

Jeff Miller reports on telecommunications, finance and venture capital. He can be reached at jmiller@masshightech.com.



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