The Big Washout: Mahi Deal Stinks for Sequoia –

The decline in optical networking valuations has been a boon for most VCs, but it’s been a bust for some high-profile firms.

The latest washout came at Mahi Networks, which recently raised a fourth round of $75 million. While St. Paul Venture Capital, Oak Investment Partners, Rho Ventures and nine others got Mahi on the cheap, its largest early backers -Benchmark Capital, G.E. Capital, Goldman Sachs and Sequoia Capital – got washed out.

After raising approximately $110 million in three rounds since being founded in September 1999, Mahi Networks limped into June with a pre-money valuation of $1 million, says Bill Cadogan, a St. Paul general partner. Although that is technically correct, it does not factor in the $20 million to $25 million in equity retained by the employees. So for $75 million, investors were able to buy about 75% of the company. Contrast that with a pre-money valuation of more than $180 million when Mahi raised $65 million in a Series B round.

“There are 200 Mahi-like companies in the optical space, and if you have the chance to pick the best of those, at good prices – to me that is a good strategy,” Cadogan says

The deal was a replica of the $120 million Caspian Networks washout round that closed in early March. “All you need to do is switch the names of the companies,” says Mahi CEO Chris Rust. “It’s not something that we are real proud of.”

The Mahi deal is also reminiscent of the $53 million 5th-round deal done for Pluris, an IP router company. In that case, upwards of 19 early backers got washed out.

VCs expect to see even more washouts as the telecom shakeout continues. “In this market there are a number of companies that are going to get caught between third base and home plate, and you can really take advantage of that,” Cadogan says.

Email Michael V. Copeland at