What doesnt kill you, makes you stronger

Financial woes at optical communications company Passave Technologies taught it sound business practices.

A start-ups success or failure largely depends on timing. Founded too soon, it will be forced to justify its technology to the world. Founded too late, it will have to fight for survival in a saturated market.

Passave Technologies cofounder and CEO Victor Vaisleib believes that had he founded his company six months earlier than he did in early 2001, it would not now exist - and it would not have been acquired by someone else. Everyone who founded a company in 2001 is crying because they didnt do it earlier. Initally, I was also upset about my timing, because I had already planned to leave the IDF and found a company in 1999, says Vaisleib.

When we began the process, it was right when US venture capital companies began slashing investments, but Israeli funds hadnt yet joined the new trend. Our initial talks for a financing round with the funds mentioned hefty valuations, but when we reached advanced negotiations, they realized what was happening outside Israel and dropped the matter. I imagine that had we obtained the money at that time, wed have burned it fast, and been very hard up now. Our torturous path to find financing forced us to hone our business plan, and I think it has paid off for us and our investors.

Vaisleib and Passave cofounder and president Ariel Maislos are both veterans of Talpiot, the IDF Military Intelligence technology unit, where they met. They will not comment on their work there.

Maislos was discharged first, and began the process to found Passave. Vaisleib joined a few months later, and they began looking for investors. They realized after a couple of months that they wouldnt get financing from the venture capital funds, so they contacted a group of private Israeli investors, who later introduced them to US investors. Each invested about $1.25 million in a rolling seed funding round that was completed in April 2001.

Shortly afterwards, Passave began preparing its first financing round, which it closed in June 2002. This time, they succeeded in interesting venture capital funds, apparently thanks to a beta site installation at a first tier company. Eurofund led the $7.2 million round, with existing investors Walden Israel and BRM Capital also participating. Intel Capital later invested an estimated $800,000 in the company.

Passave aims to develop solutions for telephone companies fighting to preserve their market share from cable companies. The telephone companies first began losing market share with the rise of broadband Internet. The subscriber loss continued with the arrival of cheap package deals for advanced telephony services and video-on-demand, which cannot be delivered over existing telephony networks. Next-generation SDL, VDSL and similar technologies will not save them.

The telephone companies only options are the unlikely use of the cable networks, fixed wireless and similar infrastructures, which are considered suitable for mass markets, or Passaves solution - laying fiber optics that will link subscribers directly with switchboards in a fiber to the home (FTTH) network.

This is where infrastructure providers and fiber optic systems, and the silicon solutions to operate them, come into the picture. Passave is developing a chip that is installed in passive optical networks (PON) that use the tried and true Ethernet protocol. The chip can support multiple users, thereby significantly reducing the number of ports serving the subscribers linked to the switchboard.

Passaves solution relies on the fact that one of the companys chips is installed at the infrastructure provider, i.e. the switchboard, while a parallel chip is installed in the box at the subscriber. Each chip handles different functions, so the chip at the switchboard is more sophisticated, capable of supporting 309 users, while the chip at the subscribers box is similar to chips installed in cable or DSL modems.

Vaisleib believes that a scenario in which a telephony companys systems provider buys Passaves chip for switchboards while its suppliers of the systems at the subscribers end buy other chips, is likely after several years. For the moment, he says the systems are uncoordinated - this from a company that manufactures chips for both switchboards and end users.

The moment the systems are coordinated, the same situation that developed in the modem and DSL markets will arise, i.e. the commoditization of the market, characterized by a multiplicity of modem makers. At that point, different chips might be installed in boxes linked to switchboards. At least in the first stage, we must have two ends, and the current battle is over performance, says Vaisleib.

Besides the chip, Passave also supplies software for the various operations the chips is designed to carry out. The software will be sold to companies that prefer not engineering their own software. Passave currently has 18 employees at its Tel Aviv office and brokerage channels in the US and Japan. The company expects to have its first commercial product ready in 2003, and its first revenue toward the end of the year. Eurofund managing partner Moshe Price is prepared to hint that three major equipment suppliers are interested in Passave.

Interest in the field will grow when the Institute of Electrical & Electronics Engineers (IEEE) approves the AH803 standard for the technology. Meanwhile Vaisleib and Price already talking about rapid FTTH deployment in Japan, where $3 billion of a total $12 billion investment was spent in 2002. The Japanese believe there will be 5 million FTTH users by 2005. There are already 130,000 users. The South Korean government has also adopted policies to promote the adoption of these technologies. Vaisleib mentions that forecasts were less rosy when the company was raising money, and he asked Price if it was possible to reopen negotiations on the company value.

Passaves competition comes from the future use of alternative technologies, such as ATM PON (APON) and other companies developing similar technologies. Vaisleib claims that Passave entered the field early enough to give it an advantage in patents and access to potential customers. The companies that entered the field after us are trying to close the gap. They might be able to launch products before us, but the Japanese market will not welcome their performances, he believes.

Name: Passave Technologies

Founded: 2001

Founders: Victor Vaisleib and Ariel Maislos

Product: A chip for fiber optic access communications systems

Financing rounds: $9.5 million

Ownership: Eurofund, Walden Israel, BRM Capital, Intel Capital and private investors

Website: www.passave.com

Published by Globes [online] - www.globes.co.il - on December 31, 2002

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