Allow me to introduce Vivek Ragavan, president and CEO of start-up Atrica. There were two notable events in his career. In 1999, a US start-up named Siara was sold to Redback Networks (Nasdaq: RBAK) for $4.3 billion. Ragavan, CEO of Siara, joined Redback that year and later became CEO. In May 2001, Ragavan unexpectedly resigned his position and has now been officially appointed Atrica CEO.
Ragavan: “Like Atrica, Siara’s goal was to revolutionize the ways that urban networks were constructed up until that time. Previously, urban networks were used mostly to transmit calls. In cases where they were used to transmit digital information, the information was transmitted on the same voice networks. This was unsuitable and prevented better network utilization. We wanted to build what is known as “the new urban networks”, or “the next generation of Sonet networks”, which were designed to facilitate Internet Protocol (IP)-based services. Those networks were easier to upgrade, and a certain number of users wanted them.”
In November 1999, Siara had 190 employees, and Ragavan planned to begin putting together a sales team. Out of the blue, the company received an attractive offer. “We were in the advanced stages of our third financing round to help us start large-scale sales of the product, when Redback offered to acquire the company.”
An optical soap opera
Redback was founded in 1996 on the basis of more or less the same idea that motivated the Siara founders. The main difference between the companies was that Redback operated in the point of presence (POP) field, the optical network’s point of access, while Siara operated in the access field, where the urban network meets the end users. Siara’s product transported the information, while Redback’s products collected information before it was transmitted on the optical network.
The acquisition of Siara took place a few months after Redback’s IPO. Redback had 300 employees at the time and its share was cruising in the vicinity of $170. Today the company is traded at about $5 per share and has 1,000 employees, after its workforce swelled to 1,200 and it had to cut back, like other companies in the communications market.
The Siara-Redback story is reminiscent of the Chromatis-Lucent deal in more than one sense. Both involved a start-up in the urban field, an acquisition at a fantastic price that today seems out of proportion, and an acquiring company whose share plummeted, like the entire telecommunications sector. A glance at the personalities involved in these companies highlights several fascinating points. Siara was founded by Vinod Khosla, perhaps the world’s best-known investor and entrepreneur. Khosla’s partner in founding the company was Raj Singh, who also founded Cerent and Stratum One. These two companies were sold to Cisco for $6.7 billion and $450 million, respectively. Add to this the sum from the Siara-Redback deal and you realize that over $11 billion has entered Singh’s pockets.
The link between Chromatis and Atrica, however, is one of this year’s hardest-hit companies – 3Com. This is where the story starts to sound like a soap opera. Chromatis founders Orni Petruschka and Rafi Gidron previously founded Scorpio, and sold it to US Robotics, which was later acquired by 3Com. Atrica founders Avinoam Rubinstain and Zvika Bronstein founded Nice Com, which was sold to 3Com in 1994. Amir Lahat, who was in 3Com’s Nice Com division, joined Atrica. Before they were closed in 2000-2001, Nice Com and Scorpio were 3Com’s development centers in Israel for a considerable amount of time.
”The cases of Siara and Chromatis were completely different,” Ragavan hurriedly stresses. “Chromatis was acquired by Lucent when the latter had $30 billion in revenue, while Siara was acquired by Redback when the latter had $65 million in revenue. The companies were on different scales. We also received offers from other companies, but we decided we didn’t want to be acquired by a huge company, because we wanted to remain in a position of influence, rather than become a tiny division within a major company.”
”Most engineers want to be there when the product reaches the stage of customer sales. They don’t want to take the money and run at the time of the acquisition. The Siara-Redback deal made history. I believe the acquisition price in our case led Lucent to pay so much for Chromatis. I also believe our deal was greatly affected by Cisco’s acquisition of Cerent. Company acquisition prices are mostly affected by other transactions, not necessarily by their potential or how important they are to the acquiring company.”
Development in Israel, manufacturing in Ireland, and a French customer
Given his great confidence in Redback’s product, Ragavan surprised many when he left Redback. He still holds a “respectable number” of the company’s shares, and repeatedly stressed his confidence in its success during the conversation, which immediately led to the obvious question of why he left.
”I don’t intend to go into my reasons for leaving. I will only say I made the decision together with management.”
”Globes”: Chromatis built itself as a US company, not as an Israeli one. Petruschka even claimed that the fact that it was considered American, rather than Israeli, was in itself an achievement. Is Atrica also moving to cover up its Israeli origin by hiring a CEO with your prestige? Is it a marketing technique to make selling easier or to facilitate an acquisition?
Ragavan: ”Atrica is neither an Israeli nor a US company. It’s a global company, which is what I like about it. It has both Israeli and US elements.”
Will development activities remain in Israel?
”Yes. We may add other centers around the world, but development here will grow as the company grows. As I said, we’re a global company, with development in Israel, a manufacturing plant in Ireland, our first customer in France, and trials with operators around the world. Our investors come from all over the world. I’m from India and reside in the US. I certainly wouldn’t define Atrica as an Israeli company.”
Atrica, which has raised $47 million in the 18 months since its founding, takes pride in its list of illustrious investors. Its seed money came from 3Com. It then received investments from US funds Benchmark and Accel, and Israeli funds Magnum and Ascend. It also received investments from a series of communications companies like Telia of Finland, France Telecom, SBC, Bell South, and even Bezeq.
The Ethernet solution
Atrica operates in the Optical Ethernet field. In order to explain, we will simplify by dividing the optical chain into three parts: optical lines linking population centers (long haul), the urban field, and the access field. The first part employs high speeds and utilizes a method called Dense Wavelength Division Multiplexing (DWDM). In order to make optimal use of existing bandwidth, this method uses optical signals of different colors for transmitting more information on the same wavelength.
The access part features access points with broadband hookups for homes and businesses, such as DSL, cables, T1, and similar systems. The dominant protocol used in these hookups is the Ethernet, which has been used for business networks for many years. The urban field serves population centers, connecting the high-speed interregional and intercontinental lines with the homes and businesses themselves. It uses a protocol called either SDH (the European name) or Sonet (the US name).
It seems, however, that information applications, which will occupy a large proportion of future optical networks, cannot be effectively used in conjunction with the Sonet protocol. For some years, attempts have been made to find a more effective way of transmitting information arriving from high-speed optical lines. This information should be transmitted at high speed over customers’ new broadband hookups.
The experts sat and decided that instead of producing an urban version of DWDM, an almost impossible and prohibitively expensive task, they would turn the problem on its head and try to develop a system that would enable information to be transmitted with the Ethernet protocol in urban areas. Atrica was not the first to develop this concept; US start-ups last year raised $60-80 million in an attempt to achieve this goal, showing the seriousness with which this solution is regarded. In addition, companies like Cisco and 3Com, from which Atrica sprang, are beginning to talk out loud about the role of this technology in the industry.
What’s so good about using Ethernet on optical urban networks?
”The use of Ethernet solves three key problems: the ability to upgrade the networks when required, the services that can be provided over the networks, and the required cost. More and more businesses with particularly great bandwidth requirements are using Ethernet as their protocol, whether within the network or at the hookup point between the network and the Internet. The other ways of transmitting information on optical networks won’t disappear overnight, but everyone realizes that the growth rate of services using Ethernet is much greater than for other methods.”
”With solutions like ours, communications providers can almost immediately give their customers several times their current bandwidth, without added cost. The second advantage of optical Ethernet networks is the materially lower cost, compared with Sonet networks.”
”The products we developed at Redback-Siara lowered the cost of using Sonet networks. Their product is designed to transmit both data and voice over those networks, but the price is still too high for most applications that will be run on urban networks. Atrica’s products are designed to significantly lower the cost of transmitting information, while adding the option of voice transmission.”
”If you look at the applications that service providers are offering today, you realize it will be easier to manage them using Ethernet protocol than by continuing to run them on Sonet. What interests the communications and service providers above all is how to add tens of thousands of new users quickly without harming the network. That’s exactly what the combination of the optical network and Ethernet makes possible.”
Will the world eventually exclusively use Ethernet protocol for optical networks?
”I believe there will be a combination of Sonet and Ethernet networks. After all, too many Sonet networks exist for them to be tossed away and replaced. As I said, however, Ethernet-based solutions are growing much faster. It’s hard to predict when this combination will reach its peak, just as you cannot forecast the pace of optical network deployment.”
Orders have already been made
Considering that there’s now a communications sector slowdown that includes a significant spending reduction, is this the right time for launching revolutions?
”That’s precisely the right time. Today companies are looking for solutions to enable them to provide services their customers require, at lower cost. If I now launch a method of doing this that costs less, the shaky financial state of companies can only help me. Today, service providers will spend money on something only if they believe it will yield an extremely attractive return. We believe that optical Ethernet is just such a product.”
That appears to be the reasoning behind the investments you received from communications companies. Are you currently looking for more financing from venture capital funds or strategic concerns?
”A number of communications companies have expressed their desire to participate in our next financing round. We’re talking with many companies in the field to persuade them that our solution is the right one, and some of them are interested in making a financial investment.”
I discovered at least six companies that raised money this year on a scale indicating they are preparing for mass production. They all deal in optical Ethernet. Won’t it be a little crowded?
”It’s as crowded as any other field with a huge market. Even after Cerent was sold to Cisco, there were still 30 companies left in more or less the same field as ours. Before that, there were about five companies doing something similar, of which Cerent was the most successful. There are also four to five companies in Atrica’s field, but one of them will be the leader, and I believe it will be Atrica.”
Are those companies competing with you directly?
”Some of the companies are components suppliers and some supply complete systems. Among the companies you mentioned, some supply systems competing directly with us, but none of them aim at building a comprehensive solution for carriers in the optical Ethernet field, which is what we intend to do.”
How long can Atrica remain independent in the competitive world of optical communications?
”We’re building a company to make profits and we’re making sure we will have revenue and profits as soon as possible. At a certain point in the company’s financial life span, we’ll have an IPO. We’re building the company for an issue. It will take place at the point at which we decide we need more cash flow to realize our original goal – to sell our products and make money. It’s impossible to predict what will happen by then and at what time it will take place. The only thing I can say about it is that we plan to operate like a public company while we’re still private, meaning that we’ll set targets for ourselves along the way and try to achieve them.”
A year ago, you said you would hold an issue in 2003. Is this date still valid?
”We’re planning on an issue at the end of 2002 or the beginning of 2003.”
What's the current situation of your products?
Founder, CTO, and senior VP for development and supply chain Avinoam Rubinstain: ”We launched three out of our four main products last May: the Edge Switches and the urban management platform. We’ll also launch our main product by the end of the year. It will include the Core Switch and integrate optics and electronics.”
Have customers already made orders?
”Field trials have already taken place with some of our future customers, and there are orders, too. Up until now, we’ve announced trials with France Telecom, Bell South, and Deutsche Telekom, among others. We also have field trials in the US and even in Japan that we have not yet announced. By the end of the year, we will have orders for the products we have launched.”
What about the revenue forecasts for 2002, based on the sales beginning this year?
Ragavan: ”We have internal forecasts, which I’m now working on, so I cannot provide specifics. I can only say we plan to accumulate very meaningful revenue next year.”
Based on the quantity of capital raised by your competitors, and in preparation for the rosy future you’re sketching, you’ll need particularly large amounts of capital. How much money are you planning to raise in the current round?
”I obviously cannot mention a sum, but I can confirm that we’re currently raising capital.”
To what degree will you compromise over the company value for the current financing round? Will you raise money at any price?
Rubinstain: ”We obviously intend to increase the company value. I cannot imagine us lowering the value.”
Published by Israel's Business Arena on July 26, 2001