Reading Andrew Schmitt's recent post on Infinera's IPO triggered recollections of my experience at an optical startup called Nanovation Technologies. At the height of the optical components bubble in 1999-2000, Nanovation sought to become the Intel of planar lightwave circuits (PLCs), by building high-speed optical sources, modulators and multiplexer components out of indium phosphide. Despite the CEO's frequent promises that "we're all gonna be millionares!", Nanovation eventually died a banal death in November of 2001. At that time, Light Reading offered a surprisingly well-informed post-mortem. I'd like to try to contrast Nanovation's and Infinera's stories and see what insights they might offer for what I hope will be eventually be a new generation of optical startups.
1) Financing and Capital Structure
Though I wasn't close enough to C-level management to confirm this first-hand, it seems certain when viewed through MBA-assisted hindsight that Nanovation's capital structure was indeed "genetically defective" as Bob Chaney asserted at the time. By initially avoiding traditional venture capital investments and relying instead on $28M of angel financing and an arcane 'back-door' stock connection with a Canadian shell company, Nanovation's founders hobbled the company's growth, IPO prospects, and ability to deal flexibly with potential later investors as bankruptcy loomed.
By contrast, Infinera's financing route looks to have been clean and clear from day one, when they raised $50M in Series A money from Kleiner-Perkins, Accel, and Benchmark. Note that they managed to close this round just before Nanovation went under, in May 2001 when the bursting of the optical bubble was already widely acknowledged. From there, Infinera steadily built credibility with investors by meeting its milestones, eventually accumulating some $315M.
2) Management
What made investors so eager to put money in Infinera, at a time when they were shunning most other optical startups? It seems safe to say that experienced, proven management was the key, just as one inevitably hears VCs claim. It's hard to imagine a more confidence-inspiring set of founders than Jagdeep Singh, Drew Perkins, and Dave Welch, given their previous successes with Lightera and SDL. Evidence that they justified that confidence? All three hold the same positions at Infinera today as they did when the company began its life as Zepton seven years earlier.
The kindest assessments I've read of G. Robert Tatum's leadership at Nanovation emphasize his flair for garnering publicity for the company. Promising $90M in research funds to MIT, timing Nanovation's initial product launch for the 120th anniversary of the electric lightbulb, spending lavishly on booths at OFC... all these gestures might have seemed brilliant had they indeed led to a spectacular IPO. But when the engineers sat down to commiserate about the challenges of coupling light into and out of InP, we often wished for a more execution-oriented CEO who would underpromise so Nanovation could overdeliver. After Tatum's ouster, Bob Chaney took decisive steps to reposition the company away from InP and towards MEMs, but by then there wasn't enough financial runway left for Nanovation to get off the ground.
3) Technology
Both Infinera and Nanovation started out as InP PLC manufacturers, and both developed sophisticated device designs and fabrication expertise. Given five additional years of life, Nanovation may well have brought compelling products to manufacturability. But Infinera's success may ultimately stem not just from its technical prowess but from patient, consistent effort and a willingness to let its IPO come as a natural byproduct of that effort rather than as its only goal.
4) Strategy
Infinera differs most strikingly from Nanovation in its 'go-to-market' strategy. Rather than position itself as yet another optical component manufacturer, Infinera has successfully built "an entire hardware/software system and carrier marketing and sales team" around their integrated optical devices, as Andrew Schmitt and Om Malik point out, insulating them from the inevitable commoditization of PLCs for years to come. Such an approach (i.e., building the box instead of just the devices) was never openly discussed at Nanovation, and would not have been practical without a more scaleable capital structure.
5) Lessons for the next Infinera
What lessons does the Nanovation-Infinera comparison offer? I propose the following:
- Keep the cap table clean and straightforward (and work with VCs that think the same)
- Assemble a world-beating management team (around game-changing technology)
- Think big, but talk small (avoid hype, both internal and external)
- Consider creating your own ecosystem (rather than simply seeking to play in the existing one)
Basic VC 101 stuff, to be sure, but if Nanovation's founders had adhered to these suggestions, they'd probably be successful VCs themselves by now (and I might too.)
