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Start-up survival tips

Sell pieces of thyself to Big Brother with channel

By Jim Duffy
The Edge, 06/12/02

What's a start-up's strategy for survival during these dire times?

Increasingly, it's selling a piece of itself to a larger player in exchange for a channel into coveted carrier accounts. Some of these deals are at the behest of carriers that would rather buy product from a known and stable commodity than from a start-up; others may be initiated by skittish investors looking for someone else to put skin in the game and assume some risk while providing a conduit into potential customers.

Equipe Communications struck such a deal with Ciena. Ciena plunked down $5 million of the $40 million in Equipe's third round and vaguely hinted at future goodies through an exchange of "technical and strategic information."

Equipe and Ciena this week are expected to divulge what those goodies are. At press time last week, the belief was that Ciena will OEM Equipe's E3200 multiservice switch.

But the oddity in this deal may be Equipe's access to regional Bell operating companies and incumbent local exchange carriers vs. Ciena's base of carrier customers as low-hanging fruit for the start-up.

The next buy-a-piece-of-me-for-your-channel-and-my-survival candidate is Gotham Networks. The maker of the switchless edge switch hinted strongly at last week's SuperComm show that it was about to strike a deal with an established vendor for resale of the Gotham switch to carriers in exchange for an equity stake.

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Gotham would not say who the vendor is but Ciena's name popped up again. Ciena spokespeople last week said they had no knowledge of such a deal while Gotham emphasized it was talking with several companies and no agreement was "currently executed."

Gotham referred to this type of arrangement as a "next-generation acquisition." Equipe says such deals are vital if start-ups are to survive telecom's nuclear winter.

"Carriers are leery about putting their network on a start-up because start-ups are dropping like flies," Equipe CEO Dennis Rainville says. "Ciena is my big brother. There are still a handful of start-ups that haven't figured it out. I don't know how they're going to survive."