Start-ups selling to survive

A survival technique is coming into vogue for start-ups during these trying economic times: The young companies are selling pieces of themselves to larger players in an effort to tap distribution channels into coveted carrier accounts, as well as raise cash.

Carriers would rather deal with known, trusted and stable entities if they are to buy a start-up's product.

Gotham Networks is said to be hammering out a deal with Ciena whereby Ciena would buy a stake in Gotham and resell the start-up's multiservice edge switches. The deal is similar to an arrangement Ciena currently has with multiservice core switch start-up Equipe Communications, sources say.

Ciena and Equipe, meanwhile, are set to confirm on Tuesday that they've expanded their arrangement to an OEM resale deal in which Ciena will sell Equipe's E3200 switch to carriers. Ciena's $5 million investment in Equipe began as an exchange of "technical and strategic information" but was expected to result in a resale arrangement.

Ciena spokespeople at SuperComm this week would not comment directly on the pending OEM deal with Equipe but said to "keep an open mind" about it. They claimed to have no knowledge of an investment in Gotham.

Gotham said there is no "currently executed" agreement and that it is talking to a number of companies. But Gotham officials at SuperComm this week strongly hinted that something is imminent.

"How do you structure your business for this climate but still grow sales?" asks Laura Howard, Gotham's vice president of marketing and business development. "We are actively engaged with a strategic partner for distribution. They get a piece of the business."

Howard would say how big a piece but sources say it will not exceed $5 million. Gotham has raised $33 million to date since its founding in 1999.

Howard referred to the investment 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," says Dennis Rainville, Equipe's CEO. "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."

But the oddity in this deal may be Equipe's access to RBOCs and ILECs vs. Ciena's base of long-haul carrier customers as low hanging fruit for the start-up. Indeed, Ciena indicated as much when it announced its investment in Equipe.

"Equipe has a real good understanding of what customers are looking for in that [multiservice core switch] market," a Ciena spokesman said back in March. "We're always looking for a way to broaden our customer base."

And its product line. Ciena now enters the multiservice edge and core switch markets with the Equipe and Gotham deals, a market that is growing to $4.8 billion in 2005 from $3.8 billion in 2001, according to Infonetics Research.

Another multiservice core switch start-up, the hibernating Tenor Networks, is said to have sold its ASIC engineers to semiconductor maker Mindspeed in an apparent effort to raise or conserve cash. Tenor went into hiding about a year ago as other start-ups were laying off staff or going belly up.

Both Tenor and Mindspeed confirmed that they are engaged in network processor development and are working on future products. But they would not elaborate.

As for edge switch maker WaveSmith Networks, which just announced its first customer, the company delivered a terse "no comment" when asked if it, too, was allying with an established vendor for funding and distribution.

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