Contacts and connections

Taking itself out of the “incubator” model, Comstellar Technologies focuses on the value of human resources — contacts to be specific — rather than plain old cash. And once a company is accepted into the family, it can expect to stay there.

Comstellar — led by CEO Sanjiv Ahuja, Chairman and Chief Technology Officer Raj Parekh and President Raj Singh — is highly selective about which companies to incubate and maintains a close eye on the companies that make it. The three decide which companies will join the fold, though some speculate that Ahuja's vote carries the most weight.

Very few business plans capture Comstellar's attention. “They are either not in our space, or we don't believe they have a viable business plan or team to execute it,” Parekh says.

Instead, Comstellar execs follow the industry and the technologies. If Comstellar identifies a market opportunity, but no existing company fits the bill, it simply creates one. “We are generating ideas we think are superior to most ideas and concepts we get from the outside,” Ahuja says.

The incubator initially focused on technology advancements. That changed when the market tanked. Now Comstellar has urged some of its companies to shift direction or alter product development based on research or industry feedback.

“We don't look at it as abandoning something,” Ahuja says. “Once you are part of the family, you keep working until you get it right. We evolve the product or change it until it is a viable and successful business.”

In some cases, the changes could result in a management shakeup, not unlike an intervention. “That's needed in families,” Ahuja says. “You have to base any business on the values and principles and good partnering: What do you expect from the rest of the family and what are you expected to give back?”

In a market where optical, wireless and component start-ups were considered sure-fire success, how does Comstellar stay afloat? “We work with research institutions and universities and key technical people in some of the large companies to really understand the breakthroughs taking place,” Parekh says. “The companies that are one-and-a-half steps ahead of the market, those are the ones we like to fund — not companies that are five steps ahead or with the market.”

Perhaps the most coveted thing Comstellar offers is industry contacts. The top executives are well-connected and highly respected in the industry, and their support goes a long way in helping a start-up build rapport. “We have pre-existing relationships and we use them, and the team's internal experience,” Ahuja says.

RealChip Communications is a more mature start-up than most companies Comstellar backs. Having a solid management team already, RealChip tapped Comstellar's technical, financial and marketing teams, says Raj Raghavan, chairman and founder of RealChip. “Their credibility, their Rolodex and their insight into how to position the company has been very useful,” he says. “We have gotten insight that has made us more sophisticated as to how we position the company.”

A Comstellation of companies

Company	Product/service	Comstellar nudge	Web site
Ashvattha.com	Chipsets for wireless and handheld systems	$4.5 million including seed funding and first round of funding from Comstellar and Redwood Ventures, March 2001	ashvattha.com
Axcel Photonics	Optoelectronic semiconductors	Undisclosed	axcelphotonics.com
Cratos Networks	Optical switching	$8 million in first-round finding, August 2000	cratosnetworks.com
Kromos Technology	Digital signal processing technologies	Seed funding from Redwood Venture partners, November 1999; became a wholly owned subsidiary in July 2000	kromos.com
RealChip	Media-over-packet systems-on-chip	$14 million from Comstellar in second round of financing of $20 million, August 2000	realchip.com
Zenfinity Inc.	Optical network design and testing services	$9 million in Series A financing, October 2000	zenfinitynet.com
Note: Four additional companies are in the formative stages, three of which are comstellar ideas. The unannounced companies include two software/services companies and two chip companies.

Comstellar also has experienced executive leadership, which it is willing to share with its incubatees. Parekh, in addition to his positions with Comstellar and investment arm Redwood Venture Partners, also holds the post of CEO for Kromos Technology. And Paul W. Shaneck has dual roles of CEO of Zenfinity and a managing director of Comstellar.

Though Shaneck was hired to be part of Comstellar's executive bench, Zenfinity needed a CEO and that's where he spends the vast majority of his time, he says. “We don't make a big deal about it as a temporary role. I devote so much time there, its like it's permanent,” he says. Still, if the company spun off, Shaneck is unsure if he would go with it.

In addition to obtaining a CEO, Zenfinity also has gotten Comstellar advice in financial, legal, marketing and human resources matters, Shaneck says. “Comstellar has helped us get into places we might not be able to get into [as far as] customers and alliance partners,” he says. “We can get in to talk to execs at higher levels…. We show up like a more mature company in the market place.”

Moving forward, Comstellar expects some companies to go IPO, but Ahuja insists that's not the goal for all its companies. Even after an IPO, Comstellar would maintain one-quarter to one-third ownership in the newly independent company, Parekh notes.

The same respect that gets Comstellar start-ups a foot in the door also has drawn investors to Comstellar. The company has raised $150 million from investors and just closed its fourth round of funding.

Ed Glassmeyer with Oak Investment Partners, a minority investor, noted that “Sanjiv is a very dynamic and effective executive… and it's his leadership and his network that led to our investment.”

It's early in the game — Comstellar was founded about a year ago — but investors appear positive. “With an investment of this nature you have to give it time. Let it cook and see what happens,” says Bret Maxwell, managing general partner with First Analysis Venture Capital.

But he expects Comstellar's additional involvement to pay off. “Comstellar plays a very active role in running the companies. They are a half an order of magnitude more [involved] than we would be. They do everything the VC does, but they do it two levels of detail deeper.”

So far Comstellar appears to have instilled loyalty within its family of companies. “I like Sanjiv's style,” Raghavan notes. “He lets us do what we're supposed to do. He monitors us, but ultimately we know the business. We don't get micromanaged.”

Recipe

Company name: Comstellar Technologies

Headquarters: Los Altos, Calif.; Florham Park, N.J.

Key Execs: Sanjiv Ahuja, CEO; Raj Parekh, chairman and CTO; Raj Singh, president; Paul Kothari, CFO; Jack Skydel, vice president of business development

Founded: March 2000

Financial backers: Accel Partners; Clarity Partners; First Analysis Venture Corp.; Goldman, Sachs & Co.; J.P. Morgan; Lehman Brothers; Mayfield Fund; New Enterprise Associates; Oak Investment Partners; Soros Private Equity Partners

Incubator focus: Optical switching, DSPs, wireless

Number of incubated companies: 10

Number of IPO spin-offs: 0

Guiding philosophy: Ahuja says Comstellar is build on the idea of “making a true difference in helping service providers solve a serious or core challenge…[and] help them generate more revenue, get them more customer traction.”

Advice to start-ups: “Nobody has a vision of the killer app. New revenue sources is the challenge we all are facing.” — Sanjiv Ahuja