Gripping the green

At a time when investors are more frugal than ever, most companies are getting the cold shoulder from investors. But while the majority are finding funding much harder to come buy, providers with Ethernet services or those with Ethernet in their business plans see investment dollars becoming more attainable.

Venture capitalists and industry investors have showered money on Ethernet providers such as Yipes Communications and Telseon. Provider Cogent Communications has also seen the benefit of having Ethernet in its collaterals.

Yipes recently closed a $200 million equity round of funding, bringing the provider's tally up to $291 million since its inception in July 1999. Around the same time, Telseon revealed that it had raised about $100 million in equity financing, bringing its total to $261 million. Telseon has also arranged for $75 million in capital lease financing.

“The timing on these [deals] is merely coincidental,” said Robert Valdez, chief financial officer for Yipes.

The investment community is looking at other models they have funded, especially those that have failed, according to Valdez.

Vesna Swartz, vice president of marketing for Telseon, echoed that sentiment. “The market right now for funding is extremely tough,” Swartz said. “The amount of due diligence is astronomical,” she said, noting that in order to get funding, companies must have a real competitive advantage such as a proprietary technology.

Telseon developed a proprietary Web provisioning system that enables customers to self-provision service. That technology, along with the Ethernet delivery mechanism, gives Telseon an advantage because it makes the company's operational cost structure so attractive, according to Swartz.

“The [CLECs] were disruptive because of regulatory changes. We are disruptive because of technology changes,” Valdez said.

The so-called disruptive nature of Ethernet that is providing an economical inroad to metropolitan area networks (MANs) may indeed be what is attracting investment dollars to the Ethernet-based providers.

The metropolitan market is a bright spot for providers because it is the area that causes the most headaches.

“There is huge value in de-bottlenecking the MAN,” said Stewart Harvey, managing director of U.S. Bancorp Piper Jaffray, which is investing in Telseon. “What we like is that they bring disruptive technology and pricing to the market. It is a very large space and the need is only going to grow,” he said.

Investors also look at management strength. “Execution is a critical element of risk, and the only way to predict [success or failure] is on the experience of the management team,” Valdez said.

While the investment community is looking at the Ethernet providers eagerly, their business plans are actually quite different. Yipes is targeting small and mid-sized businesses that extend the reach of the local network, via Ethernet. Meanwhile, Telseon is reeling in multiple deals with companies such as 360 networks and Level 3 Communications, looking to beef up their connections in metro areas.

Cogent Communications, also a favorite with investors, is using Ethernet to offer enterprises a flat rate service of 100 Mb/s for $1000.

“We are really a single-product company,” said Dave Schaeffer, CEO of Cogent. “People perpetuate the myth that customers want bundled services, but the fact that WorldCom and AT&T [have broken apart] is testament to the opposite,” Schaeffer said.

In addition to the funding Yipes has secured, the company also recently inked a deal with Genuity. As part of the agreement, Yipes will buy managed connectivity services from Genuity, giving Yipes the backbone infrastructure to connect its regional IP networks. But to make the deal sweeter for Yipes, Genuity is also investing $10 million in Yipes.

“It is a buyers' market right now,” said Cary Robinson, senior research analyst at U.S. Bancorp Piper Jaffray. “This is when you make the most money.”

Briefly

Every millisecond counts

Cable & Wireless this week will announce its enhanced service level agreements for its dedicated high-speed Internet services through its IP network in the U.S., U.K., Europe and trans-oceanic connections. The company is guaranteeing an average monthly latency of 55 milliseconds for intra-US traffic.