This old VC saying is true: After you make an investment, the first two board meetings are the worst. It’s when all the bad news comes out. Maple Optical, maker of the so-called telecom “god boxes,” was a classic example.
Maple appeared to be a gem that fit our telecommunications-focused investment strategy. It had great technology from inception. It was devoted to building Internet Protocol/MultiProtocol Label Switching (IP/MPLS) technology, a standard for routing data packets over the Internet, for next-generation telecommunications networks. Its technology was intended for the same markets targeted by companies such as Cisco, Juniper and Avici. If there was a subtle difference it was that Maple was going after the telecom market on the edge-switch side rather than the core terabit router side, where other private companies, like Pluris, were staking their claims.
The problem that we didn’t see fast enough when we invested in January 2002 was that building technology for next-generation networks was already becoming irrelevant. IP was no longer top of mind for telecom carriers. The fact that one day all traffic would be IP was as valid as apple pie and motherhood, but that would not help us close customers. The new imperative for the telecommunications carriers was to save money, and there was little or no room to invest in future network build outs. Carriers like Qwest and WorldCom, reeling from their own problems, were naturally wary of working with pre-product startups that had counted on contracts from these giants for their very survival. In fact, these company makers and their sizeable spending habits-WorldCom planned to spend $13 billion on equipment this year alone-stopped spending period.
Darwinism, as almost every venture capitalist knows, can be painful. It’s full of write-offs and reorgs and technologies that should have worked but didn’t. Pluris, not one of our portfolio companies, offered us an example of what we didn’t want to happen to Maple.
Pluris had been banking on next-generation networks for five years. It had raised $203 million in five rounds, the latest being $53 million in February 2002, as it developed a distributed router architecture that could scale up to speeds of 10 terabits of data per second.
It was ambitious, but two things happened to derail its plans. First, competitors like Avici Systems, Cisco and Nortel Networks all shipped their own terabit-scale products while Pluris was still testing and planning. Second, and more importantly, as the market turned, capital spending for bigger and better equipment dried up. If carriers were going to spend any money, they were going to spend it on maintaining legacy systems. For Pluris, this meant closing its doors. For Maple, it meant shelving IP in favor of asynchronous transfer mode (ATM), a standard communications protocol for most telecommunications legacy systems.
Companies like Maple illustrate what can happen when wonderful technologies are built that enter the market at the wrong time. Important questions then need to be asked.
First, do you have the fortitude as an investor, board member or management team member to overcome massive institutional inertia and admit where you went wrong and change direction? This is one of the more difficult things a venture capitalist can be faced with. But the sooner it’s done and mea culpas are out of the way, the more efficiently a business can attack a new area of focus. Wait too long, and as seen many times before, the ship will sink.
Secondly, because everything must be decided in rapid order with decisions made on the fly, VCs must be much more hands-on-modifying the team, recasting the product, selecting a new market focus, etc. There is little time to ask third-party “experts” or try to hire the “right” team to run the company. This is where VCs with operating experience have a huge advantage over those who don’t.
The Maple board of directors adopted a team approach to solving this problem. Bob Kondamoori and Krishna Viswanadham from Charter, Atiq Raza and Atul Kapadia from Raza Foundries and Mark Dubovoy from Leapfrog Ventures all talked directly with customers to understand both immediate network choke points and spending patterns.
Next, they changed Maple’s management, since change is almost impossible to bring about when management is moving at a high velocity in a given direction.
Atul Kapadia, managing director at Raza Foundries, was given the CEO job. The seamless working relationship between Atul and the other board members made Atul a credible agent of change inside the company.
All board members pitched in. Atiq, Bob and Krishna helped Atul strategize and align the business with the new market realities. Since cash is king, some unpleasant cuts had to be made to stretch cash. Bob and Krishna rolled up their sleeves and were in the trenches giving Atul advice where needed in terms of cuts, product positioning and how to pull engineering schedules in.
The key to the success of this turn-around was the hands-on involvement by the directors, open communication between the directors and the new CEO and an overwhelming alignment of purpose between the CEO and the board.
We invested in Maple because it had the best technology out there, but we had to refocus two and a half years of R&D because no one wanted it.
We had been caught up by the guarantees presented by the Qwests and WorldComs of the world, but didn’t realize Qwest and WorldCom themselves might fall into trouble. In a sense, we and most VCs must realize we are at the mercy of a much larger and more fragile world, as we work with larger companies as customers, cast out a wider net for potential acquirers and search for opportunities in the public markets.
Further, there are external factors playing out in the world economy, such as the Asian crisis and the impact of Sept. 11, which can and will affect our portfolio companies in significant ways, no matter how long-term our thinking is.
A New Box
Maple is now developing a next-generation network-core switching platform focused on helping service providers scale their ATM networks and migrate toward an all packet-based network using MPLS. When and how the customers choose to do this will be up to them. Yet, all of the research and development that Maple bankrolled over the last three years didn’t need to go away simply because we went back to maintaining legacy systems. The new technology was simply built into a different box, one that serves the maintenance needs of legacy systems while making them what we call future proof-kind of like a Volkswagen with a Porsche engine.
At the end of the day, we do not invest in technology just to hang tombstones on our walls. Our experience with Maple and the market shakeout with Qwest, WorldCom, Global Crossing and the like highlight for us that we must pay attention to the outside world more than ever. If that’s a shock to some VCs, it is probably reflective about how insular we can become in this industry.
In this sense, we need to be both technologists and economists, but economists who care about the macroeconomics and interdependencies of a very large world. Not just because it’s important, which it is, but because not caring about what’s happening, or what potentially could happen outside Silicon Valley could hurt us deeply. And no VC wants to find out about it at that next board meeting.
Ravi Chiruvolu, a general partner of Charter Venture Capital, is a regular technology columnist for Venture Capital Journal. Send feedback or questions to firstname.lastname@example.org. Chiruvolu specializes in enterprise software, software infrastructure, e-business and wireless. He sits on the boards of Ellie Mae, ManageStar, Quantum3D, Talaris, Verano Winery Exchange and Xavient Technologies.