Start-up Happy to Roll Out Router after Tech Implosion

Published 06/19/2003

By VIKAS BAJAJ / The Dallas Morning News

RICHARDSON - As the telecommunications industry melted down around him during the last 2 ½ years, Ken Lewis was in the enviable position of having nothing to sell.

Mr. Lewis' Chiaro Networks Inc. found itself protected from the agonizingly protracted death many area start-ups suffered as they tried to sell phone and data companies new Internet and phone gear. Their product, a large Internet router, was still under development.

Not anymore.

Chiaro, one of the most ambitious of North Texas' 1990s venture-funded firms, has finished work on its long-awaited machine and has commenced its battle against time and competitors such as mighty Cisco Systems Inc.

"For us the window is here," Mr. Lewis said. "The window is now."

Chiaro provides an instructive case study of a young telecommunications manufacturer's many challenges. It must develop for and sell to large carriers, who themselves are struggling to survive, before its venture-funded bank accounts run dry or investors throw in the towel.

The company must do all this against the backdrop of a Richardson Telecom Corridor that has been savaged by a protracted industry meltdown. Confidence has been shaken not just in the area's brood of young ventures, but also in towering pillars such as Nortel Networks Corp. and Alcatel.

Experts say Chiaro has as good a chance as any Dallas-area start-up to succeed.

Blue-chip group

It has raised $210 million since its 1999 inception, including $80 million in early 2002. Among its investors are the blue-chip Dallas venture firms - Sevin Rosen, CenterPoint and InterWest - collectively known as the 16th Floor for their office location at the Galleria.

"If you look at their board members, these are guys with a strong track record in telecom," said Guy Hoffman, a Dallas-based partner with TL Ventures, which has not invested in Chiaro. "The fact that they have continued to support this as a winner just speaks volumes about the management team and the people involved."

The firm has already overcome significant adversity.

Days after it was incorporated, Chiaro was sued by Alcatel. The French telecommunications giant accused it of stealing sensitive technology by hiring away key employees. The suit was settled in July 2001. Both companies said terms of the agreement prevented them from discussing it.

That may have been the easy part. The hurdles Chiaro faces now have grounded many experienced telecommunications hands.

"The key question for them right now is can they add a couple more carriers to their customer list over the next 12 to 18 months?" said Mark Bieberich, a senior analyst at Yankee Group, a Boston-based research group.

"If they can, chances are very good that they can survive. If they can't, their survival will be in question."

Winning customers will take more than a cutting-edge router - which Mr. Bieberich and other experts say Chiaro has.

Cause for hope

Here is what will work in Chiaro's favor:

Network operators are dissatisfied with their biggest routers - cabinet-sized computers that direct, or route, e-mails, Web pages, music and other data.

The machines, which are mostly supplied by Cisco and Juniper Networks Inc., fail more often than telephone switches and thus must be bought in pairs. Each router can handle only a modest amount of traffic, forcing carriers to tie dozens of them together. These limitations make networks expensive to build and operate.

"Those boxes are not inherently reliable today," said Jack Wimmer, MCI's vice president of network architecture and advanced technology based in Richardson. "As a consequence, we have to build several levels of redundancy."

Mr. Lewis said Chiaro solves those problems by using lasers to direct Internet traffic as light, not electronically as is done today. That allows the router to handle more data. It's also more reliable, Mr. Lewis said, because it houses two independent systems that can back each other up.

The company's two paying customers have endorsed its assertions.

Researchers at the California Institute for Telecommunications and Information Technology are using the router to study what new applications could be created if networks had many times their current capacity.

"It's an extremely flexible system for us to undertake our research objective," said Philip Papadopoulos, program director for grid and cluster computing at the San Diego Supercomputer Center. "Clearly how much traffic we are trying to [put] on it is overkill now, but it won't be overkill two years from now."

IP Networks Inc., a San Francisco-based carrier, bought a Chiaro router for its new Bay Area network and plans to add another this summer. Chief executive Gary George said the machines will significantly reduce its capital and operating costs.

Those testimonials are fine and good, but experts say it's going to be much harder to win business from older, bigger carriers who already have extensive relationships with Cisco, which declined to comment for this story.

Mr. Wimmer said router upgrade plans hinge on factors beyond its control - economic and Internet traffic growth. If neither grow fast enough, MCI, and conceivably other carriers, may not buy soon enough for Chiaro, which says it has enough cash to fund itself through 2005.

And when the orders come, the firm will face heavy competition from a half-dozen other start-ups, Cisco, Juniper and Alcatel.

Experts said Chiaro and other small vendors have several disadvantages:

• They lack the legions of engineers that giants such as Cisco field to train customers and troubleshoot problems. (Chiaro has 156 employees, about 38 of them at a development office and factory in Israel.)
• Big guys can better afford to cut prices to win contracts.
• Start-ups are more likely to fail.

"To get into a conversation about whose technology is better is futile because it's almost irrelevant," Mr. Bieberich said. "Because that's not what's going to win deals in the long run. It's going to help, but it's not going to be the sole differentiator."

Mr. Lewis agrees and said he's looking to strike a deal with a major vendor such as Nortel Networks, which would put its brand on the router and offer maintenance and other support.

"A partner brings the infrastructure," Mr. Lewis said. "He takes away any concern from the carrier about global support 24/7. He has the deep pockets necessary to make sure this thing is successful."

Asked if such a close relationship might lead to an acquisition, Mr. Lewis agreed. "You have to have a serious engagement process before the wedding."

The lovelorn Telecom Corridor would gladly cheer such a ceremony.