Venture Buzz: For Sigma, the More the Merrier

Mar 02 2001

Here's one solution to the problems plaguing networking companies like Nortel Networks , Lucent Technologies and Cisco Systems : build them some new customers.

This week, for instance, Sigma Networks, a 1-year-old San Jose, Calif.-based service provider, raised $435 million from a group including Benchmark Capital , Oak Investment Partners, Frontenac , Technology Crossover Ventures and Epoch Partners. Most of the cash, though - $290 million - came in the form of debt, much of it in the form of vendor financing from Cisco. Sigma contends it can reach positive cash flow without any more funding.

"The move was driven by the current state of the financial markets," says Sigma CEO John Peters. "The onus is now on the company to execute. If we do our job and get these networks constructed, the capital markets will reopen at some point."

Weirdly, at a time when venture capitalists are suffering big losses on a wide range of investments, some investors are reacting by being more aggressive than ever in funding their favorite companies. The gradual approach is too risky considering the present environment, says Sigma board member Andy Rachcleff, a general partner at Benchmark Capital, which incubated Sigma. "The investment community doesn't want to see a company that is not fully funded. There were a lot of CLECs [competitive local exchange carriers] that didn't raise enough equity and debt, so they had to fold," says Rachcleff. "Also, those companies were the fifth and sixth to market. We provide the only complete solution - it's just us vs. the incumbents."

Sigma counts heavyweights like AOL , Cable & Wireless , Enron Broadband Services , Covad Communications and 360Networks among its customers. Its service is already available in the Washington, D.C., area, and it is aggressively pursuing other large metro regions, such as San Francisco and New York.

Though Sigma is well-funded, it does not lack for competition. "At some point, the network is going to converge," says Anand Gowda, a principle at Carlyle Ventures who focuses on networking.

Indeed, Sigma isn't the only company that raised big bucks this week. Looking Glass, an Oak Brook, Ill., based CLEC, this week secured $275 million in debt financing for its second round, including $175 million in senior debt from Barclays Bank, Credit Suisse First Boston , Deutsche Bank , J.P. Morgan, Merrill Lynch and Salomon Smith Barney. The company also received $100 million in vendor financing from Cisco. All told, the company has now raised $475 million.

- Coreon, a provider of managed services for broadband communications services, raised $73 million in debt and equity this week in a round led by Bowman Capital. Other investors include Cabletron Systems , Comdisco Ventures , Kleiner Perkins Caufield & Byers, Sands Brothers and Western Technology.

- Tropic Networks, which creates a service platform to integrate data services with optical transport, raised a $60 million second round. Crescendo Ventures led the round. Other investors include Goldman Sachs and Raza Foundries.

- Iolon, which makes tunable devices for optical networks, raised $53 million in its second round. Bowman Capital, Kleiner Perkins and Optical Capital Group participated.

- UBS Capital announced that it would break away from its parent company and raise a $3 billion private equity fund. Meanwhile, Pequot Private Equity Group closed its third fund, PPE III. The fund will focus on expansion stage telecom, infrastructure, health care and e-business companies.

- Intel said it will acquire chip company VxTel for about $550 million in cash. VxTel makes a digital signal processor and software that allows telecom equipment makers to deliver voice and data services over packet-based networks. VxTel investors include ADC Ventures, Applied Micro Circuits , Bowman Capital, Intel Communications Fund, Juniper Networks , Raza Ventures, Sequoia Capital , Telesoft Partners, Tellabs , Virata and Vitesse Semiconductor , among others.