News

What It Takes Now -Even with a hot product, a realistic business plan, and managerial discipline, the road ahead is no freeway

On a late Friday afternoon in an industrial park in Hayward, California, across the San Francisco Bay from Silicon Valley, the weekly cocktail blast, an anachronism at most surviving tech companies, has
started at Glimmerglass Networks. Bill Banyai, chief technology officer of the company that specializes in development of tiny, ultrafast microelectromechanical systems (MEMS) optical switching engines,
grouses about losing cocktail time after "giving the pitch to idiots who showed up at 4:30 p.m."

Richard Rapaport, 03.25.02 Forbes ASAP

In his size-15 black Converse hightops, Banyai, the 47-year-old Glimmerglass cofounder, towers over the ten engineers mixing up strange alcoholic concoctions in the company’s restaurant-quality kitchen.
The complaint about the late-arriving venture capitalists is partly facetious, but only partly. "The pitch" is something Banyai has done a lot of. When hard times hit during early 2001, Banyai and cofounder
Gene Campbell ran into a financing wall. To secure enough second-round financing to keep the company alive, they had to meet with more than 200 venture firms. Banyai’s air of jaded irony fits nicely into a
general in-your-face attitude, a style that can be traced to the early-1980s era of Johnny Rotten and The Sex Pistols. "We’re a bunch of punks," says Banyai, wearing a Glimmerglass bowling shirt identifying
him as "Flounder." He describes the prevailing motif of his mostly black-clad engineers as "San Francisco industrial art, Burning Man festival, booze and mayhem."

"Foul Friday Drinks" (as the end-of-week ritual is called), fender-bending automobile polo matches in parking lots, and punk corporate swagger are not the only cultural influences that separate Glimmerglass
from its fellow startups in the once-golden Class of March 2000. In that memorable spring, when seed capital really did grow on trees, a record $9.1 billion of venture capital was transfused into 547
companies in Silicon Valley. As is now well documented, many of those companies have gone the way of double-digit earning multiples. But, having stared into the abyss, Glimmerglass is hanging in there. In
the darkest days of last year, when all around them companies were folding, Glimmerglass executives began to rethink everything: the business plan, the technology, funding–anything to make the tricky
move from an era of easy money and slack discipline to a time when every penny must be squeezed mercilessly and each competitive advantage exploited.

Glimmerglass did have certain inherent advantages over its contemporaries, especially the dot-coms. For one thing, it had a blue-collar, real-product foundation. "We are not software kids pulling all-nighters
and sleeping under desks," says Paul Alioshin, vice president of engineering. "This is work you have to do on a full stomach and a good night’s sleep." The core team at Glimmerglass is made up of scientists
and engineers in their 40s, part of a tight network of micromachinists that features alumni of the University of Arizona, the Lawrence Livermore National Lab, and early makers of MEMS such as Silicon Light
Machines. Long before the Internet boom, most of them had been in the business of carving gears, cogs, and mirrors out of glass. "We do science with a capital ‘S,’" Banyai says about the company’s
technology.

This technology involves 3-D MEMS optical switching subsystems, credit card-size arrays of tiny lenses and gimbaled mirrors etched onto silicon and quartz wafers. Coupled with an advanced control
system, these MEMS subsystems used in optical switches enable thousands of light-borne telephone signals, computer data, video, and audio streams to be routed through a network. Today Glimmerglass’
subsystem has state-of-the-art speed and scalability. It also offers extremely low degradation of the information-carrying photons that bounce off the tiny mirrors to complete connections. Three-dimensional
MEMS design means that each of these tiny mirrors can rotate independently on two separate axes and thus be aimed and re-aimed at various lenses that serve as ports. Combined with a highly
sophisticated operating system, 3-D MEMS subsystems are able to switch a magnitude of circuits exponentially greater than current 2-D MEMS subsystems on the market. Because the 3-D system’s mirrors
can be aimed, far fewer are needed to deliver greatly increased switching power.

The difference between 2-D and 3-D MEMS design becomes important with large switching arrays, such as those for phone systems. For example, using 3-D MEMS subsystem design for a switch with
more than 1,000 fibers in and 1,000 fibers out requires 1,000 micromirrors. To do this in 2-D design would require 1 million mirrors–impossible to fit practically on a single piece of silicon.

"2-D is widely thought to crap out at the 32 x 32 connection level," says Alioshin.

With $7 million in early-stage funding, Glimmerglass and its investors were betting on the proposition that 3-D MEMS would be the engine driving fiber-optic networks toward ubiquity in the next decade. To
meet the requirements of giant all-fiber-optic networks, the company originally planned to develop full systems with massive switch arrays with very high port counts. By June 2001, as the money began to
run out, these plans, and the company itself, were in jeopardy. Looking back, Glimmerglass veterans find it hard to believe that the company had been funded only a year earlier with the overoptimistic goal
of producing entire fiber-optic networks complete with switches, gears, and software. Of course, there was nothing unusual in this peak-and-valley syndrome; it was the result not just of easy venture
money but of hyperinflated ambitions.

Mark Housley, who was hired as CEO in June 2001, has a background in switching. Housley loved the technology at Glimmerglass but thought the engineering team might be overreaching in its business
plan. "Before I got here, they were trying to become Boeing. They wanted to build 747s from scratch," he recalls. But Housley saw a practical streak in Banyai’s band. "Instead of being interested in building
cool stuff for its own sake," Housley says, "our guys were interested in building elegant solutions for real market needs."

The new CEO fit in well at Glimmerglass. In his mid-40s and a contemporary of the founders, Housley sported a Che Guevara beard and looked more like a Beat poet than a tough executive. He came across
as far more simpatico than several of the other, more buttoned-down candidates. There was one more thing: "Mark showed up with a black eye," Alioshin recalls. "It endeared him to us immediately."

Housley’s first moves were anything but endearing, however. Shredding the business plan, he cut the company’s burn rate in half. "We were going to run out of money by September," Housley says,
explaining the difficult cuts. He pared the staff to essential talent only. When the painful downsizing was over, the staff totaled 47 (engineers, scientists, and a few administrative employees).

Concurrently, he made a ruthless reappraisal of what the company could profitably produce. "We had to match spending to a realistic view of what our market would actually be," Housley says, recalling
early conversations about the future of the company.

"We kept focusing and focusing," cofounder Banyai recalls about the process of figuring out what the company could do with its technology and with the money it still had. According to Banyai, the mantra
became: "Why spend our now-expensive venture money developing things we can buy? So we dug back down to what we knew best, which turned out to be MEMS switch engines and MEMS
subsystems."

By pruning its objectives, Glimmerglass retreated from the impossible task of taking on the Nortels and Lucents of the world, and instead put itself in the much more viable position of producing subsystems to
telco suppliers such as Corvis and Ciena. This went over well with outside observers.

"We were impressed by Glimmerglass’ focus. Every time we saw them, they had made rapid progress," says Scott Pohlman, senior technologist at Williams Communications, which owns the largest fiber
network in the nation. Pohlman believes that pure optical switching will begin to be deployed by the major telcos within the next 18 to 24 months, and that Glimmerglass is in position to supply systems
developers with the core subsystems for switches and controllers.

In the summer of 2001, Housley’s most critical job was to find money to keep the company going until customer contracts were signed. A frantic round of meetings with VCs around the country took up 80%
of his time and made it clear that the market for venture capital had turned upside down since the founding of the company. "I’d love valuations of three to five times earnings," Housley says, recalling tech’s
old financial order, "but that was all totally irrational."

Incredibly, it had been little more than a year since Banyai had gone into the Sand Hill Road offices of Onset Ventures with a single-page proposal and 14 slides to describe his ideas for a company using
micromachining technology to create fast optical networks. Within three weeks Onset had given Banyai $7 million. But a mere 12 months later it was a new venture capital game, and the boys at
Glimmerglass knew it. In a do-or-die atmosphere, Housley did what he had to do to get second-round money.

"These guys are getting a great deal, and they love it," Housley says about Glimmerglass’ potential worth in the new game in which VCs hold all the cards. All an entrepreneur can do, he says, is "take the
best offer and move on."

Living by the new rules, Housley managed to complete a large round of financing in late 2001. "I don’t need a customer for two years," Housley says about the results of his cross-country trolling for dollars.

Company founders were forced to deal with the reality that their share in the company had been diluted to one-third. "They got whacked," Housley says, "but not killed." By reducing the company’s burn rate
to $700,000 a month, Housley is confident he can keep Banyai and friends in Pernod and Cointreau for a while longer before customers begin buying the product. With its MEMS subsystems tested and
ready, Glimmerglass is in serious contract negotiations with several major telecom systems suppliers.

"I think 3-D MEMS is a great next-generation technology play," says William Woodward, CEO of Anthem Venture Partners, whose midsize venture firm already backs Umachines, a 2-D MEMS company in
Pasadena, California. On a morning in mid-January 2002, Woodward and one of his partners, Todd Jerry, are seated across their board table from Housley, who has flown down from San Jose. Woodward,
founder of Macromedia and Cognet Microsystems, who now spends his time on the venture side of deals, seems highly sympathetic to the company.

Housley is relaxed and playfully answers a list of questions before going through his slide presentation. The Glimmerglass CEO views the meeting more as an opportunity to meet Woodward than as a plea
for funds. He wouldn’t mind raising an additional $2 million to $4 million from Anthem, he tells Woodward, but with enough cash in the bank for two years he has the luxury of viewing the meeting as an
exercise in relationship building. Or so it might seem, if things were what they were in the bubble days. But given the new, ultracautious venture climate, the long view is the only way to look at the altered
state of the technology business. "I need to start talking to my ‘C-round’ people now," he says emphatically.

Glimmerglass has hard-won new funding and a management made up of realists. But the optical switching market will grow far more slowly than once predicted. So why are these people having such a
good time at their Friday parties? Partly because they firmly believe that fiber will ultimately replace copper and their technology will make a fiber-optic future possible. But to Bill Banyai, it’s simpler. "The
people who get together on Friday are a core group of engineers who have always wanted to get together, party, and build really good gear." In the end, that may be enough. http://www.forbes.com/asap/2002/0325/052.html

News Catrgory Sponspor:


Dorsey & Whitney - An International business law firm, applying a business perspective to clients' needs in Missoula, Montana and beyond.

Leave a Comment

You must be logged in to post a comment.