Cyberians After Ice Age

The drive from picturesque San Francisco to San Jose in the boom-era ’90s used to take two hours as you crawled at 10 miles an hour on the clogged Highway 101. Today, the journey to the heart of Silicon Valley takes less than an hour, as you zoom past signs and banners that sadomasochistically reinforce the tough times being faced by the technology sector. Now Leasing! 70,000 square feet available! 110,000 square feet! 260,000 square feet! 1 million square feet! You zip past the empty shell of a building that once housed the brightest of Internet names, Excite@Home.

The situation is no different in Boston, Dallas, Seattle or Raleigh, where the technology downturn has left thousands of companies without a future, and almost a million people without a job. As if that wasn’t enough, accounting scandals rocked the battered technology and telecommunications sector. Chief executives are running scared, as Washington DC legal eagles want them to certify the legitimacy of their balance-sheets, and if found lying, go to jail. To paraphrase Hunter S. Thompson, it is "fear and loathing" time in Silicon Valley. Against this backdrop, who cares about innovation and new ideas, and starting new companies? Apparently, a lot of smart entrepreneurs, many of South Asian origin, do! They have shrugged off the bad news and gone back to work.

Infinera, Canesta, Starent Networks and Virtela Communications are but a few of the hundreds of new companies which have opened their shutters in arguably the worst business environment since the late 1970s. Any one of them could be the next Cisco, Oracle or Sun Microsystems. For those who forget history, most of today’s technology blue-chips were founded in recession of the 1980s. And history as we know repeats itself. At a recent lunch, Promod Haque, general partner at Norwest Venture Partners, pointed out that a lot of venture capitalists can’t distinguish between the good and the bad plans, and just like late 1990s when they funded bad business ideas; they are now shunning good ideas.

In the first quarter of 2002, the venture capital investments skidded 23 per cent to $6.2 billion from $8.1 billion in the previous quarter, according to data collected by accounting and research group PriceWaterhouseCoopers. Jesse Reyes, vice-president at Venture Economics, San Francisco, says: "The bottleneck in liquidity has created a conundrum for the investor. Do they invest in new companies or continue to invest in current portfolio companies until exit? It doesn’t necessarily mean that companies in the current portfolio are unsuccessful and need help, but the liquidity constraint in the market does mean that it’ll take longer to exit investments than it did a few years ago."

The spigot of venture money moves in lock step with the public markets. The public markets have been in a free fall since March 2000 with the technology-focused NASDAQ Composite Index off almost 90 per cent from its highs to around 1400. Initial public offerings have become the financial dodos and as a result many venture capitalists who funded dumb ideas and me-too optical communications companies are stuck nursing bad businesses. Those bad businesses are taking in the dollars, which in a perfect world should go for more deserving and promising start-ups. "What you are seeing is the greed cycle being replaced by the fear cycle," says Vinod Khosla, general partner at Kleiner Perkins Caufield & Byers, and one of the most successful venture capitalists in the trade today. Not the one to mince words, Khosla points out that "a lot of good business plans that need to be funded are going to miss out".

"The market is in a funk right now and it will be for a year or two and that will unfortunately have an impact on the start-ups, but longer term it (telecom) is going to be a high-growth market and I am very bullish about the prospects," says Khosla, explaining why, in recent months, he has funded Infinera, arguably the most audacious new start-up in years.

Originally called Zepton, the San Jose-based Infinera is the creation of Jagdeep Singh, Drew Perkins and Dave Welch, and is attempting to build the first mass-produced integrated photonic circuit. A task well nigh impossible, Infinera was started with one thought: how to lower the cost of building and managing the optical networks. So, instead of building the fastest and the biggest equipment, Infinera decided it was time to attack the economics of the networks.

The former chief executive of C-Cube Microsystems, Alex Balshinski, general partner at Benchmark and an investor in Zepton, points out that "there comes a time when the existing equilibrium breaks down under its own weight". He believes that the next generation of networks are not all about performance and higher speeds. Instead, they are about making them cheap, not just to build, but to provision and maintain, and for that you need a disruptive technology. "For the longest time, it was not obvious that the microprocessor would become as important as it has, and I think RISC processor and Infinera are of the same magnitude," adds Balshinski.

Of course, it helps that the three co-founders are all proven entrepreneurs and have successful companies under their belt. They do not have to worry about money, and instead can focus on building permanent companies, points out Jagdeep Singh, who has three other companies to his credit. His second venture, Lightera, co-founded with Perkins, was sold to Ciena for $625 million in 1999. David Welch, on the other hand, does not have to worry about his mortgage, since he was one of the senior executives who benefited from the sales of optical component maker SDL to JDS Uniphase for over $40 billion.

Like Infinera, Vab Goel, co-founder of Virtela Communications, decided to attack the economics of the networks when he decided to start Greenwood Village, a Colorado-based start-up, in 2001. One of the key architects of Qwest Communications’ network, Goel knew that the planet was awash with bandwidth. "What we did was we built a virtual fibre network," he says, using a souped-up virtual private networking technology.

Virtela helps companies connect their branch offices, headquarters and other operations over different types of networks, and also offers services such as video on demand, virtual security, and voice over IP on its virtual network. While the cost of building networks has ruined names like 360networks and PSINet, Virtela leases bandwidth from network owners like Qwest and only pays for the bandwidth it uses, and its virtual pipe expands and contracts as demand fluctuates. Such a simple solution that none thought of it earlier. The company within a year of founding could easily top $25 million in sales.

More and more entrepreneurs confess that to get over the downturn blues, they are looking to start new companies and try and look for the next Mount Everest to climb. Of course, if they have a successful company or three under their belt and money isn’t a problem, innovation becomes more feasible.

That certainly is true in case of Ash Dahod, who recently started his fourth company, Starent Networks. His previous efforts have made him fabulously successful—he started NetCore Systems, which was snapped up by Tellabs; Sigma Network Systems, that was acquired by Standard Microsystems Corporation (now Cabletron); and Applitek Corporation which was acquired by Bay Networks (now Nortel Networks). Based in Tewksbury, Ma, Starent is building devices that help bridge the gap between Internet protocol-based wireless and wireline networks. Already, the firm has signed up lucrative contracts in China and other countries in Asia, and has partnered with the likes of Samsung. These deals have helped the company raise about $22 million in venture capital funding in clearly the worst funding environment in recent memory.

Like Infinera and Starent, the spate of innovation continues. Insiders are focusing on new technologies such as Infiniband, Indium-Phosphide and Silicon Germanium-based optical components, web services, grid computing and real-time computing. "Fewer people are starting companies, which naturally leads to less innovation, but I think there are better ideas coming out of this region than other places, because people around here live and breathe innovation everyday," says Charles Beeler, general partner with El Dorado Ventures, a veteran venture capital firm based in Palo Alto, California. "I think it is a great time to be starting a company from scratch—hiring strong teams is easier, competition has decreased, start-up costs are way down and there is more time to build a real company as opposed to the push everyone felt in 1999-2000 to get to market quickly and find an exit," he adds.

Advice that Westford, Ma-based Narad Networks co-founders Dev Gupta and Andy Chapman have taken to heart. They are building boxes which allow high-speed and we mean high-speed data and voice communications over existing cable network infrastructure. By tailoring their devices to the precise needs of the cable operators, and giving them ability to offer high-end services like storage and web-hosting to small and medium-sized businesses, Narad has won a lot of customers. Gupta, who had previously co-founded MaxComm and Dagaz and then sold them to Cisco says that in this environment the key to build a successful company is focus and knowing what the paying customers want, and then innovate on top of those demands.

Canesta too has followed the same dictum—it has developed "electronic eyes" which enable users to interact with devices like palm pilots, cellphones, cable boxes and handheld computers through virtual keyboards and other similar applications. The company co-founded by Nazeem Kareemi, Abbas Raffi and Cyrus Bhmaji is one of the cutting-edge companies which started in the middle of the technology downturn, and is seeing demand for its products increase by the day despite an adverse economy.

Virtela, Canesta and Infinera aren’t isola-ted examples. They represent the resilience of the entrepreneurial spirit. It’s just nice to know that when it comes to South Asians, the desire to innovate hasn’t dived with the NASDAQ stock index.