The European optical components industry is in the midst of a transformation, mainly due to the rise of the Internet and an influx of US and European venture capital (VC). Historically dominated by a handful of major players, including Siemens, Alcatel, Ericsson, and British Telecom, the European optoelectronics business has begun to bear witness to a startup frenzy of sorts.
Research firm Yole Developpement (Lyon, France) estimates that about 50 European companies currently are involved in the optical components field, and the phenomenon is by no means limited to those countries traditionally considered to be breeding grounds of telecom innovation (England, Scotland, France, and Germany). Italy, Switzerland, Sweden, Finland, The Netherlands, and even Liechtenstein are now home to independent optical-components ventures.
"Europe has a very strong braintrust in photonics, ranging from world-class corporate and multinational research projects to a tradition of trained optics craftspeople," said Karen Liu, director of optical components at RHK (South San Francisco, CA). "Particularly in the areas of high-speed optoelectronics and novel fibers, but really across the board in photonics, there's been a real backlog of technology looking for a commercial outlet."
True to European tradition, however, most of these young commercial ventures are spin-offs of universities and government-sponsored research facilities. Southampton Photonics (Southampton, England), a manufacturer of optical amplifiers, fiber laser arrays, and optical filters, has its roots in the Optoelectronics Research Centre at the University of Southampton. Kamelian (Glasgow, Scotland) is commercializing optical-amplifier technology originally developed at the University of Strathclyde. BlazePhotonics (Bath, England) was founded to commercialize holey-fiber technology developed at the University of Bath. Modulight (Tampere, Finland) is doing the same with detectors, transmitters, and pump lasers developed at the Optoelectronic Research Centre of Tampere University of Technology. Optillion AB (Kista, Sweden), a manufacturer of fiberoptic Ethernet transceivers, has ties to Sweden's academic research circles through two of its founders: Christer Svensson, professor of electronic devices at the University of Linköping, and Lars Thylen, professor of photonics at the Royal Institute of Technology. The Institute of Applied Physics at the University of Bern (Switzerland) also gave birth in 1999 to Sercalo Microtechnology (Schaan, Principality of Liechtenstein), a developer of MEMS-based optical switches.
Despite mostly humble beginnings and stiff competition from well-funded spin-offs of the major telecom providers, many of these firms are attracting significant private investment. Some have even gone on to file successful public stock offerings and move into the big leagues.
Take Bookham Technologies (Abington, England), for example: while the firm no longer warrants startup status, having been founded in 1988, its achievements are no less noteworthy. In fact, when the conversation turns to successful startups, Bookham is often cited as an example worth following. After raising just $1.4 million in its first round of financing in 1995, one year later the company had attracted $7 million from a group of investors led by 3i Group (London, England), Europe's leading VC company. The next round of financing in 1997 netted Bookham $18 million, and by 1998 Cisco and Intel had invested $20 million in the company. When Bookham finally went public in April 2000, the company raised $320 million, and a secondary offering just five months later netted another $143 million.
Similarly, Highwave Optical Technologies (Lannion, France) went from a small startup to a highly successful public company in just two years. Founded in 1998 by two former France Telecom researchers, Highwave manufactures amplifiers, multiplexers, fibers, filters, and other optical components for telecommunications applications. Initially funded by Technocom, a France Telecom VC entity, and Newbridge Networks, the company raised $2.7 million in first-round financing in early 1999. Part of that funding came from Newbury Ventures, a US VC firm, and Innovacom, a wholly owned subsidiary of France Telecom that has become the leading VC provider for information technology in France. In March 2000, the initial investors kicked in another $5.4 million and France Telecom Technologies disbursed $3.8 million for a stake in the fast-growing company. When Highwave went public at $29 per share just three months later, the two-year-old venture raised $66.8 million.
Another French company, Memscap (Grenoble), went public earlier this year, raising $142 million in the process. Founded in 1997, the company had raised nearly $15 million in two rounds of funding led by European VC companies, including Innovacom (Paris), SPEF Groupe Banque Populaire (Paris), and ETF Group (Manno, Switzerland). Memscap provides MEMS-based components used in telecommunications. The company is divided into three business groups: wireless communications, optical communications, and CAD tools.
Although it has yet to go public, Kymata (Livingston, Scotland) is also often cited as a "mover and shaker." Founded in 1998 to design and manufacture integrated optical components and subsystems for the telecom and datacom industries, the company has raised $162 million in private funding. Its fourth round of funding, completed last October, netted $67 million; shareholders include 3i, British Telecom, Comdisco Ventures, and Chase H&Q. The company has also just opened a new 50,000-sq.-ft. planar fabrication, packaging, and test facility, more than tripling its production capacity.
Many healthy returns
Now a new generation of startups is attracting serious attention from both European and US venture capitalists, and the sums have swelled into the double digits. Southampton Photonics netted $55 million in first-round funding last June—one of the largest private investments in the components industry to date. Major investors include Quantum Technology Partners, a Silicon Valley firm formed explicitly to invest in Southampton; Amadeus Capital Partners, a British technology investment firm; and Interwest Partners and Seven Rosen Funds, both of which have a stake in Ciena as well.
In one of the largest private placements in Sweden last year, Optillion raised $53 million in its second round of financing, led by Crescendo Ventures (Palo Alto, CA). Other investors include Cisco Systems and Investor AB (Lund, Sweden), an early-stage venture firm focused on networking-hardware investments.
No less impressive is Teem Photonics (Grenoble, France), which manufactures optical waveguide components for DWDM fiber-network applications. Founded in 1998 as a commercial spin-off of the R&D consortium GeeO, the company has raised $36 million in two rounds of financing. The firm received $31 million in the second round alone, one of the largest VC investments in France last year. Second-round investors include two US VC firms, Baker Capital and Lightspeed Venture Partners (formerly Weiss, Peck & Greer).
Teem Photonics actually sought out US investors as a logical extension of its presence in the American market, which currently accounts for 70% of its business, according to Carol Leslie, public relations manager. The company is also in the process of establishing a US subsidiary this year and expects to be profitable by the middle of 2002. "We have seen other companies like Southampton Photonics raising funds from US investors as well as European," said Chris Schaepe, general partner with Lightspeed. "These companies view their customer base globally, and they see the value in having US VC firms invest in their capital base."
Lightspeed is also part of a group of investors backing Kamelian, the Scottish optical-amplifier firm launched last July with $1.5 million in seed money from 3i. Just six months into the venture, Kamelian raised another $18 million, with 3i kicking in $9.5 million and Lightspeed the other $8.5 million. To date, Kamelian has attracted about $25 million in venture capital, according to Paul May, founder and CEO. "There has always been a ceiling on second-round financing in Europe, which has limited the number of startups," May said. "But in the last two years that has changed, mostly because of US money."
Much of Kamelian's venture capital is being used to build a 25,000-sq.-ft. manufacturing facility in Oxford and ramp up for full-scale production. The company expects to begin shipping its first products by first quarter 2002 and increase its staff from 25 to 100 within a year. An IPO would be a next logical step, but is likely still two years away, according to May.
Another UK firm attracting overseas investors is BlazePhotonics, the University of Bath spin-off. Celtic House Investment Partners, Canada's leading VC firm, joined with Quester Capital Management (London, England) to provide BlazePhotonics with $9 million in first-round funding. The company will use the money to establish a custom facility and expand its R&D and operational teams. As part of the deal, the University of Bath will be a significant shareholder and will vest all of its existing and future intellectual property arising from research in photonic crystal fibers in BlazePhotonics. "[The BlazePhotonics] team has developed, and continues to develop, revolutionary next-generation fiber technology," said Alo D'Arcy, general partner at Celtic House. "This investment reinforces Celtic House's commitment to creating successful new companies out of the best university research groups and continues our focus in the optical communications field."
Swiss components
Switzerland has also become a hotbed of commercial activity in the optical components field. OptoSpeed (Mezzovico, Switzerland), which supplies 10-Gbit/s receivers, superluminescent LEDs, semiconductor optical amplifiers, and nearly 50 different high-end optical components, was founded in 1995 as a spin-off of the Institute of Quantum Electronics (Zurich), part of the Swiss Federal Institute of Technology (ETH). The company has doubled in size since its inception and expects to report income of $8 million on revenues of $46 million this year, up from income of $2 million on revenues of $12 million in 2000, according to Roberto Dall'Ara, president and CEO.
The ETH has also been instrumental in helping GigaTera (Dietikon, Switzerland) get off the ground. The startup raised $7 million in first-round venture financing last February, led by Broadband Capital (Zug, Switzerland) and JK&B Capital (Chicago, IL). GigaTera is developing ultralong-haul transmission products but declines to disclose on what technology these products are based.
Other startups are emerging in more northern climes. A single corporate sponsor has taken a 40% stake in Modulight, the Finnish developer of optoelectronic components for fiberoptic networks. Picogiga (Cedex, France), which manufactures compound semiconductor products for a number of communications applications, invested $12.4 million in Modulight and plans a series of capital increases over the next year. Going outside of Finland was a natural step for Modulight, which was founded in May 2000. "Our first round of financing is among the biggest found in Finnish startups," said Seppo Orsila, vice president of Modulight. "The local venture capitalists and companies lack the necessary expertise in this domain, and since we wanted to have an investor who is able to understand the business, not just supply us with money, going abroad was the only solution for us."
Multibillion-dollar market
The benefits to be derived from such cash infusions are obvious. But what is driving the surge in VC interest in these companies? A number of factors, not the least of which is the phenomenal growth of the Internet as a communications hub. The research firm RHK (So. San Francisco, CA) estimates that the global market for optical components and subsystems will grow from $5.5 billion in 1999 to $21.3 billion in 2003, fueled in large part by the push to build affordable and reliable networks that can handle increasing volumes of high-bandwidth data traffic.
"The timing for our investment is excellent," said Ali Shadman, a partner with JK&B Capital, a first-round investor in the Swiss firm GigaTera. "With Internet and data traffic growing exponentially, optical networking is at the center of a revolutionary change in telecommunications, comparable to that caused by semiconductors in electronics or PCs in computing."
The European tradition of government-sponsored research and development is another incentive. The development of advanced optical components demands a unique set of specialized skills not easily found outside Europe's major universities and research institutions, and this has created several centers of technology excellence across Europe.
"We have a nice portfolio of US-based optical components companies, including Lightwave Microsystems and Light Logic," said Schaepe. "But unlike some other technology areas, we found a really strong core competence in advanced optical components technology in Europe."
The bottom line
As with most things in life, the bottom line is also responsible for driving American VC dollars into the European technology market. Silicon Valley is brimming with high-tech companies, making it increasingly difficult for startups to put together the kinds of management and engineering teams that instill confidence in venture capitalists. With fewer European companies competing in the optical components marketplace, the pool of talent is significantly larger than in Silicon Valley or other US technology meccas. "US firms are investing in European technology companies because they can get more bang for their buck," said Robert Schraff, managing director of Europath (Temecula, CA), a company that is helping European firms gain a foothold in the US market. "A top-level Ph.D. in Europe will make $60,000 per year and be thrilled. But bring them to the US and they expect to make at least $150,000 per year."