Jeanette Symons

On paper, Zhone Technologies looked like another startup ready to explode in early 2000. The recipe was complex but familiar: Take a group of entrepreneurs, mix in huge batches of money from top-tier venture capital firms and investment banks, create an access product for the burgeoning CLEC market, throw in a bunch of acquisitions, go public a year or two later, then kick back while larger vendors clamor to catch up or buy the company.

Then reality stepped in.

Over the course of the last year, as the telecom market turned from exuberant to dour, Zhone's original customer targets either stopped spending or went belly-up, the venture capital pool dried up and IPO plans have been put on hold.

Given the conditions, one might expect to find the company in a bomb-shelter mentality, hoarding cash and slashing operations in an attempt to ride out the storm. However, according to Jeanette Symons, co-founder of the company, Zhone hasn't radically changed its plans but has modified its short-term outlook.

“We've had to pick the type of carrier we want to go after,” says Symons, who serves as chief technical officer and vice president of engineering for Zhone. “We've focused a lot more on the traditional copper carrier. In North America our focus is on the major carriers, as well as carriers that are CLECs but tend to have some kind of solid customer base.”

While the company has developed a broad-reaching access platform, it's getting the most traction with its broadband access node. “Everybody talks about these great next-generation, solve-the-world's-crisis networks, but the reality is because carriers don't want to put huge amounts of risk into it, they want to get there incrementally,” Symons says.

From a product development standpoint, Symons says the company is being more mindful of its expenses. In mid-2000, Zhone had about 14 different products under development, and while those efforts are still ongoing, some of the R&D isn't getting the same level of funding. “We've actually not scaled back at all,” says Symons. “We took some hard looks at areas where we shouldn't be spending as much money.”

From the beginning, Zhone was planned as a big company that would compete with Cisco Systems and Lucent Technologies for big contracts from big U.S. carriers. To get there, though, Zhone was expected to rack up wins from the emerging carrier base, which has since shrunk considerably. In response, the company has put a lot more effort on the European market, thanks in part to a partnership with Ericsson that lets Zhone sell its access product line through Ericsson channels.

“It's frustrating not having that traditional emerging carrier market [in the U.S.] but it's not directly affecting us,” says Symons.“In Europe, where deregulation is brand new and just starting to unfold, the market looks a lot more like the U.S. did 24 months ago.”

Indeed, the company's ability to generate revenue from international markets is relieving some of the pressure to go forward with its IPO, Symons says.

“There's always some amount of pressure to get results this week. The flip side of that is we were really lucky in that we built up just as big of an international organization as we did in North America. That's growing a lot faster than we anticipated. We've probably put about 50% more into that effort than we thought we would.”

Zhone also got lucky with timing, she adds, noting the company certainly couldn't have gotten the level of funding it did had it waited until 2000 to form. “We snuck in under the wire on that one.”

Having that cash and revenue from acquisitions, most notably from the former Premisys Communications, gives the company a certain time cushion with its IPO, according to Kevin Mitchell, directing analyst for service provider networks at Infonetics Research. “They're certainly are not alone in holding off. Convergent Networks just pulled their IPO, and a lot of companies that filed last fall have things on hold. I would think they're OK for awhile.”

“We don't need to go public,” says Symons, noting that the company is aware it's being watched. “Right now everybody says, ‘You're not a cute little baby company anymore.’ A lot of people are waiting to see what we do and how we do.”