The shift is a direct result of plummeting communications costs, which make it far cheaper to outsource call-center services than to run them in-house. Not only can a company save 40 to 60 percent by buying a direct link to an outsourcing center in India, but it also gets a much better educated staff -- mostly college graduates -- to answer its calls, say outsourcing company representatives. Venture capitalists like the math and are pouring millions into CRM startups.

Talisma, based in Kirkland, Washington, pulled in $12.3 million in a second round led by Oak Investment Partners. Other investors were the Madrona Venture Group, SeaPoint Ventures, and Cedar Grove Investments. Talisma develops CRM software and offers outsourced CRM; it has 600 employees, 450 of them in India. Total funding: $43.8 million.

ISeva, based in Jersey City, New Jersey, landed $8 million in a second round led by e4e. The company offers call-center and software integration services over leased lines stretching from New Jersey to India. Total funding: $8.5 million.

Coremetrics, a traditional CRM company, captured $31 million to develop its software, which measures core business metrics for online businesses. Lead investors for the San Francisco company were Accel Partners and Highland Capital Partners. Other investors included General Catalyst and Tinshed. Total funding: $48 million.

CancerVax is the furthest along. The company, based in Carlsbad, California, is in the final round of clinical trials for a vaccine to treat malignant melanoma. It received a first round of $30 million from Forward Ventures (lead investor), Vector Fund Management, Amerindo Investment Advisors, Athenian Venture Partners, and an undisclosed drug company.

Xcyte Therapies (Proposed Nasdaq: XCYT) uses superparamagnetic microbeads to treat kidney cancer. The beads "highly activate" a patient's blood, recruiting lymphocytes (immune cells) to destroy cancerous cells. The company, based in Seattle, raised $28 million in a fourth round from MPM Capital (lead), Alta Partners, Arch Wireless Holdings, Falcon Technology Partners, Fluke Venture Partners, the Sprout Group, Tredegar, Vulcan Ventures, Vector Fund Management, and the MGN Opportunity Group.

Artecel Sciences uses human adipose tissue (a.k.a. fat) from liposuction clinics to develop novel therapies for cancer, bone marrow transplants, and cosmetic tissue repair. The company, based in Durham, North Carolina, raised $4 million in a first round from Eno River Capital (lead), TriState Investment Group, Bio World Venture Capital, Fujisawa Investment for Entrepreneurship, and private investors.

Last year, 35 health care funds raised a record $4.3 billion, according to PricewaterhouseCoopers. That's almost double the $2.3 billion raised in 1999, and more than four times the 1996 figure. The upsurge in dollars belies the fact that health care VCs actually had a tough time raising money from limited partners (LPs) throughout the Internet boom.

The quick hits and outrageous returns that LPs got from Internet-focused venture funds made slow-to-mature health care funds unattractive. But with the collapse of dot-com companies, LPs are looking to diversify their holdings -- especially into health care-specific funds.

Domain Associates, a VC firm based in Princeton, New Jersey, exemplifies the strong interest in health care. It set out to raise $350 million for its fifth fund in September, but ended up pulling in $464 million after six weeks.

The last time Domain raised a fund, it was in the thick of the Internet frenzy -- the summer of 1998. On its road show, the early-stage health care firm had to really sell LPs on its fourth fund. It took 14 explanatory slides to convince investors. This year, just a single slide was needed, says general partner Arthur Klausner.

THIS MIGHT HURT A BITEven though Domain and other health care firms are finding their funds oversubscribed, they're not eager to put that cash into the hands of new startups, says Tom Salemi, senior editor of the newsletter Venture Capital & Health Care.

The total dollar amount that went into life sciences portfolio companies last year soared 45 percent from 1999, to $6.53 billion, according to researcher Venture Economics. But the actual number of companies funded increased by just 11 percent, to 1,100.

Why the discrepancy? Health care VCs are putting most of their money into portfolio companies to keep them afloat until the IPO window reopens, Mr. Salemi says. The result is more money for fewer companies. In fact, the average life sciences venture round increased 52 percent from $6.7 million in 1999 to $10.2 million last year, according to Venture Economics.

It's not hard to find jaded biotech entrepreneurs. Michael Conrad, CEO of six-year-old Chromagen, is weary after his recent fund-raising drive. "It took the lining off my stomach," he says.

Based in San Diego, Chromagen makes fluorescent dyes and drug screening instrumentation for biological research and drug discovery. The company, which is close to profitable and will post revenues of $5.7 million this year, had raised five rounds of venture funding totaling $15 million. Plus, it has kept an extremely low burn rate, spending just $15 million over six years to build its diverse product lineup.

Even so, Mr. Conrad had to do 12 investor presentations in Japan and no fewer than 48 in the United States, he says. All that for $15 million.

"It's nothing like the old days," he says. "Back then you'd submit a 15-page business plan to the NIH [National Institute of Health] and get funded."

Chromagen was funded by Zesiger Capital Group (the lead investor), Essex Capital, SAC Capital Associates, DRW Venture Partners, United Capital, Jafco, and Nippon Venture Capital.

Acurian CEO Leslie Michelson has a similar story. His company's Web-based applications have helped organize more than 60 clinical trials for 35 customers -- including the top seven drug companies in the country -- but Mr. Michelson had to pitch 50 different investors before he could land a second round of $27 million.

"I wouldn't say it ripped the lining off my stomach, but it got to my GI tract," Mr. Michelson cracks.

Euclid SR Partners led the round for Acurian, with participation from Sofinov, Merck Capital Ventures, ProQuest Investments, JP Morgan Partners, and Flatiron Partners.

Additional reporting by Matthew A. DeBellis.

The CEO of IBM (NYSE : IBM), the world's largest computer maker, is now throwing his weight around in the venture capital business. Big Blue is investing in chip startups in particular.

Over the past year IBM quietly invested in six chip companies in 2000: Kymata, EZchip Technologies, Onex Communications, Multilink Technology, Triton Network Systems, and Transmeta (Nasdaq : TMTA). On Wednesday it added a seventh company to its portfolio, joining in a $14.2 million first round in Sierra Monolithics. IBM typically buys a 5 to 10 percent stake in the companies it invests in, a company insider says.

SIGNIFICANT SEVEN

Seven deals may not sound like a lot, but the trend is "significant," says David Barry, senior editor at The Corporate Venture Capital Report. Unlike corporate investors such as Dell Computer (Nasdaq : DELL), Intel (Nasdaq : INTC), and General Electric (NYSE : GE), IBM has been conspicuous in its lack of direct investment in startups, he says.

IBM doesn't have a separately run venture fund like Dell, Intel, GE, and a host of other tech titans. That may be about to change. When large corporations make five to ten direct investments over a year, they often "suddenly" formalize a venture program, Mr. Barry says.

IBM has made about a dozen direct investments over the past three years, according to market researcher Venture Economics, but there hasn't been a clear focus, except for two investments in Linux companies Red Hat (Nasdaq : RHAT) and Turbolinux. Historically, IBM has taken equity stakes in startups indirectly by investing in venture funds.

IBM's concentration on chips may very well help it succeed. "We're focusing on growing our business in three areas: software, services, and technology -- and technology includes the chip business," says John Kelly, head of the Technology Group at IBM. He previously ran Big Blue's microelectronics business.

IBM's chip strategy is to invest in and share intellectual property with semiconductor startups, ultimately providing them foundry services.

Slowly but surely, IBM has become a chip-manufacturing leviathan. The company is one of the largest foundries for specialized chips, which it makes for companies such as Compaq (NYSE : CPQ), Transmeta, LSI Logic (NYSE : LSI), and Advanced Micro Devices (NYSE : AMD). IBM announced a $5 billion capital investment last October for a new state-of-the-art chip plant.

PROOF IS IN THE PAY-OFF

Under CEO Lou Gerstner, IBM has been looking to commercialize the technology breakthroughs made by its scientists. The strategy has been paying off: IBM Microelectronics's fourth-quarter revenue grew 34 percent from the same quarter a year earlier, IBM's communications chip business is growing 100 percent year-over-year, and the company's annual revenues from chip manufacturing operations total $3.5 billion, Mr. Kelly says. To keep growing this business, the company is investing in and partnering with startups.

Mr. Kelly declines to say how much IBM has invested overall in semiconductor startups or how much it has set aside for future deals.

He adds that when looking at investing in a young company, IBM tries to find ways to create synergy through providing access to each other's intellectual property. For example, IBM is working with Sierra Monolithics to develop high-performance microchips for emerging optical communications applications, including 10-Gbps and 40-Gbps networking systems. Sierra is using a silicon germanium (SiGe) circuit design that is an area of expertise for IBM. (SiGe is a high-performance semiconductor material.)

Founded in 1986 in Redondo Beach, California, Sierra Monolithics previously designed communications chips for third-party companies using IBM's SiGe technology. Those design services brought Sierra a boatload of customers from Big Blue and a profitable business, with a run rate of about $5 million a year, says CEO Charles Harper.

MONOLITH INVESTMENT

Sierra Monolithics raised its first round of venture capital (from IBM, Storm Ventures, and U.S. Venture Partners) to pursue a different business plan. It is transforming itself into a fabless semiconductor company. Sierra will continue to build designs around IBM's SiGe techniques, but it will now bring its own chips to the market for ultra-high-speed optical networking equipment.

If Sierra is successful, IBM will make money on its investment, as well as capture a significant cut of the high-speed optical chip market, where the top-speed chip currently runs at 10 Gbps.

IBM's Mr. Kelly believes that a combination of manufacturing expertise, capacity, and intellectual property is going to become the model for the foundry business going forward. In contrast, Taiwanese companies such as Taiwan Semiconductor Manufacturing focus on pure manufacturing of the chips.

MAKING MARKETS

"We do very little pure foundry, and a lot of our intellectual property goes into these new products," Mr. Kelly says. He points to the company's investment in Scottish optical component maker Kymata. Under the agreement, IBM is licensing its pump laser technology and its innovative silicon-oxynitride (SiON) process technology (which applies high-volume semiconductor manufacturing techniques to optical chip-making) to Kymata.

At least one analyst sees IBM's venture strategy as little more than a way to add customers for its manufacturing business. "It's seed money in the hopes of growing their foundry business," says Dean McCarron, a principal analyst at Mercury Research, a chip research firm in Scottsdale, Arizona.

IBM is one of the only foundries that provides funding to potential customers, he adds. It does so to create a market for advanced technologies from its "second to none" patent portfolio that may not otherwise find customers immediately, he says.

Even if IBM makes a big move into venture capital, it isn't guaranteed to have a significant impact, says Jesse Reyes, managing director of Venture Economics. "They've had five different corporate venture groups over the last ten years," he scoffs. "The guy who was running the [IBM venture] program eight years ago came out with his guns ablazing, saying, 'We're going to be the biggest corporate VC around.' Eighteen months later he was gone."

The prospect of having to raise another round of funding hangs like a dark cloud in front of every telecom entrepreneur. The venture-capital-free-for-all for communications startups is over. And the build-it-and-they-will-come philosophy, which drove private investment in the so-called "comm" sector last year, has been turned on its head. VCs are now looking for business plans with capital efficiencies and incremental buildout strategies, and that target established customers. The story of Mr. Kane and Telseon's effort to get funding is emblematic of the economic shift.

Mr. Kane has brought in a total of $186.5 million in venture capital for Telseon. (The new round includes $50 million in debt.) He's been trying to raise money ever since he closed on the company's second round of $80 million in March 2000. The original plan was to issue a substantial amount of high-yield debt and then take the company public. But when the IPO window virtually closed, Mr. Kane was forced to return to the private equity market.

DOWN AND DIRTY

The CEO, who has spent more than 25 years in the telecom industry, says he's never financed a business in a market this bad. "I'm not as excited as I'd like to be," he says of the new round. "One year ago, whatever-kind-of-piece-of-garbage business plan you had would get funded. It's gone from euphoric to nonexistent."

When raising his second round at the peak of the market, Telseon had a post-money valuation of $236 million. Despite growth, the company was given a relatively flat valuation on the new round. (Mr. Kane would not reveal the exact valuation, but said "it hasn't gone up significantly.")

"If Telseon can raise a flat round at a flat valuation, they should be congratulated," says Peter Wagner, a general partner at Accel Partners. "Other people in the same exact space just can't do it, or they are doing it at massively down rounds. And even those aren't coming together."

Rick Frisbie, a general partner at Battery Ventures and a long-time communications investor, agrees with Mr. Wagner, but adds that later-stage firms are those most affected by the current downturn because they are closer to the public markets. Valuations for late-stage telecom companies are off anywhere from 25 to 75 percent, he says. In contrast, valuations for communications startups are off by 25 percent -- still significant, but not as dramatic, he adds.

Mr. Kane downplays the significance of Telseon's flat round. "It's a pay-me-now-or-pay-me-later proposition," he says. You shouldn't get hung up with private equity valuations, because if you have a good business, you'll get your money on the public markets, he says.

Telseon was able to maintain its valuation because it has made considerable progress with its business plan. It has 42 customers, including Compaq Computer (NYSE : CPQ), Incyte Genomics (Nasdaq : INCY), and Qwest Communications (NYSE : Q). It offers services in 60 co-location facilities located in 20 markets.

Telseon's services compete with incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs), which charge substantially more money for competing high-bandwidth connectivity services.

Telseon uses off-the-shelf Gigabit Ethernet equipment and dark fiber (unused fiber-optic lines already in the ground) to connect multiple co-location facilities like those run by Exodus Communications (Nasdaq : EXDS) and Equinix within a given city.

IN EXCHANGE FOR A FEW BUCKS

The company makes money by tying the co-location facilities together and by selling connectivity services to customers with equipment residing at separate hosting sites. Altavista, for instance, pays Telseon for a 100 MBps fiber-optic line that ties its equipment together with hosted data storage provider StorageLink, which houses its equipment in a co-location facility across town.

But the firm is still a way off from profitability. With a scaled-back business plan, Mr. Kane is predicting profitability within 14 months. That plan requires Telseon to have 14 accounts in each of the 20 cities where it now offers services. That's not an easy task: it needs to land 238 more accounts to reach profitability.

But even with 350 employees and a burn rate of around $5 million per month, the new round gives Telseon a "fully funded" business plan, Mr. Kane says.

The new round, which will close in about one month, consists of approximately $100 million in equity and $50 million in vendor financing. New and previous investors include Pivotal Asset Management, Sevin Rosen Funds, Crosspoint Venture Partners, Morgan Stanley Dean Witter, and Goldman Sachs. Another three to five investors were involved, but Telseon did not release their names.

Mr. Kane's advice to today's telecom entrepreneurs: find a VC who can fund three rounds internally. "In these times you have to have good friends," he says. "It's not easy to get new ones."

Not everyone agrees with Mr. Curme that the sky is falling. Veteran VC market researcher Jesse Reyes downplays the impact of Internet company failures on the overall venture community. There will be a "train wreck" of a couple of hundred Internet VCs who started out two to three years ago, but those funds account for only 10 percent of the total venture capital under management, says Mr. Reyes, managing director of Venture Economics. The failure of B2Cs and B2Bs ultimately means that VCs will have to go back to basics, spending more time on deals and being satisfied with historical rates of return, he says.

STARTUP STOPS

Massive Internet failures spell bad news for VC firms, but their impact may be more harsh for entrepreneurs in search of funding. As growing numbers of VCs spend more time tending to troubled portfolio companies, their investments in new startups will grind to a near halt.

Mr. Curme's findings jibe with those of market researcher Forrester Research (Nasdaq : FORR). Although Forrester hasn't put a dollar amount on potential losses from Net investments, it predicts that 75 percent of online-only retailers will fail and that only a handful of B2B exchanges will survive.

If the public markets are any indication, the odds of bringing any B2C or B2B companies public are next to nil. Online stock site VTO Report tracked 215 Internet companies and found that every single company's stock is lower than its 52-week high as of November 30 -- by an average of 93 percent. The typical stock fell from $78.93 per share to $5.53. The median share price is $3.38, with 49 companies trading at less than $2 per share and another 15 trading under a buck.

The walking dead include E-stamp (Nasdaq : ESTM), 23 cents; PlanetRX (Nasdaq : PLRX), 28 cents; Popmail.com (Nasdaq : POPM), 31 cents; Talk City (Nasdaq : TCTY), 34 cents; and Fastnet (Nasdaq : FSST), 63 cents. (All stock prices are for Wednesday, December 5.)

NUMBERS SCRUNCHING

After the Internet bubble popped in April, Mr. Curme began to run some numbers. Worldwide property and business losses due to natural disasters cost $50 billion every year. The S&L scandal of the late 1980s cost taxpayers $153 billion.

But the amount of money invested by VCs in B2Cs and B2Bs is larger than even the S&L losses, Mr. Curme contends. He figures that 80 percent of the $183 billion invested by U.S. private equity firms between 1998 and 2000 will be written off and that the vast majority of those write-offs will be for failed B2C and B2B companies.

"It's really grim," says Seema Williams, a senior analyst at Forrester. If heavily financed e-tailers such as Living.com and Furniture.com continue to fail, the trend may very well equate to the tremendous losses that Mr. Curme predicts, she says.

With the IPO window virtually closed, Mr. Curme reckons that a slow-motion train wreck is in progress. Limited partners are tightening their belts by refusing to put money into smaller VC funds and scaling back investment in general, he says. Consequently, VCs have to be more judicious with their present funds.

NO IMMUNITY

Even Crosspoint Venture Partners, which has virtually no consumer Internet exposure, is bracing for a downturn. It recently turned away $1 billion for a new fund, citing a market that has "reached the point where it's not just bent -- it's out of kilter."

The slowdown is apparent to anyone seeking funding for startups. "It's not that VCs are doing zero new investments, it's that they're doing far fewer and with heavy due diligence," says Rob Ryan, former CEO of Ascend Communications (bought by Lucent) and the founder of some 17 startups.

Back when Ascend was seeking funding in 1989, the company took three to four months to develop its business plan and rehearse it, then another three months to get a check from VCs, he says. That kind of time is an eternity for Net entrepreneurs, who have grown used to hearing stories of VCs writing checks for new deals in less than a day.

You may reject Mr. Curme's doom-laden scenario, but he has touched on points with which most VCs and industry observers agree: investment in new startups is grinding almost to a halt, and early-stage firms are finding it more difficult to raise money.

RETREATING VC

Closer to home, VCs must embrace the fact that internal rates of return (IRR) will fall from the obscenely high 500 to 1000 percent to the historical norm of 20 to 40 percent, says Mr. Reyes of Venture Economics. He predicts that the third quarter of 2000 will bring the first negative IRRs the VC industry has seen in more than ten years. (Preliminary results show that to be the case.)

"The dirty little secret of the VC industry is that, until the Internet phenomenon, they weren't investing in startups," Mr. Reyes says. From 1987 to 1995, a mere 10 percent of all VC funds went to early-stage deals, he says. That percentage rose between 1997 and 2000 to the 20-percent range. Now VCs are reverting to later-stage deals, which carry less risk and require less time and energy, Mr. Reyes says.

"Being a startup expert is a risky place to be," he continues. "The Department of Commerce predicts that 80 percent of all startups will fail in five years, and VCs don't do much better."

Some 289 VCs raised funds in 1999, and another 250 funds sprouted up this year. But 2001 will see the number fall into the double digits, predicts Mr. Reyes.

For Ed Scott, a general partner at communications-focused VC firm Baker Capital, the problem with the last three years' worth of investments is that the VC community has funded "products" rather than stand-alone companies.

Many sickly upstarts were doomed from the start because their technology was weak and the management team was poor, Mr. Scott says. Such startups would have served better as part of an existing company rather than as a stand-alone firm, he adds.

The fundamental premise for Baker's continued investment, Mr. Scott says, is that the communications sector remains a strong source of good new deals.

He adds that Baker Capital doesn't forsee many failures of its portfolio companies due to lack of funding. The firm, with more than $1 billion under management, sets aside two to three years' worth of cash for each of its deals, so they have time to break even without going to the public markets.

AWAY, CHICKEN LITTLE

Angel investor Ron Conway is also skeptical that losses from Internet failures will cause the sky to fall on the VC industry. A general partner at Net-heavy boutique firm Angel Investors, Mr. Conway says that failures have caused a slowdown in new deals getting done but that saying it's a crisis on the order of the S&L disaster is downright "crazy."

Even Angel Investors, which is far more vulnerable than most because of its Internet focus, has enough diversity to return a "decent" two to five times its investors' money, he says. That remains to be seen, considering that Mr. Conway admits his fund will write off at least 20 percent of its portfolio.

As for why Angel Investors isn't raising a new fund, Mr. Conway says it's due to "lifestyle" reasons, not to the rash of Internet company failures. Still, he admits, the prospects of raising new funds from limited partners would be tough, since seed-stage Internet deals require a lot of time and effort.

The $50 million left over from Angel Investors's current fund will be reserved for the "winners" already in its portfolio. There will be very few new investments, Mr. Conway says.

He hit the gas on the 612-horsepower beast, lost control, slammed into an embankment, and the mighty McLaren spun around six feet off the ground. "The first woman who saw us thought we were dead," recalls Mr. Thiel, X.com's acting CEO. "The whole thing felt like a roller coaster gone a little bit out of control."

The accident, which occurred this past spring, is an apt metaphor for X.com, which may be headed for a crash with reality. Last week, it abandoned Mr. Musk's founding idea, shutting down its ailing Internet bank. It has burned through roughly $110 million of $175 million in venture backing. Two CEOs have come and gone in less than a year -- Mr. Musk and Bill Harris, once the head of Intuit (Nasdaq : INTU) -- leaving Mr. Musk to conduct an executive search. And X.com is blowing through cash at the jaw-slackening rate of $6 million per month.

Despite the bevy of bad news, Mr. Thiel claims his company is well positioned to break even by the end of 2001 and go public by the first or second quarter of next year. X.com isn't your typical on-the-ropes Internet upstart, he says.

BEST-LAID PLANS

Mr. Musk founded X.com as an Internet bank in March 1999, a time when investors bit at any Web-based businesses with the potential to "disintermediate" traditional competitors -- in this case brick-and-mortar banks. But it turns out that it's very difficult to make money from online banks, and X.com is now winding down its banking business. Mr. Thiel downplays the death of the original business plan. "It was a small legacy business," he says. "We didn't want the headache of a full charter bank."

The company is now focusing exclusively on an online payment system that it acquired through the purchase of PayPal in March of this year. PayPal provides an online money-transfer system, allowing Web customers to send money using credit cards or electronic balance transfers from personal bank accounts via a secure email transaction. (X.com now emphasizes the PayPal brand over its own. Users who seek X.com on the Web will find themselves faced with the PayPal logo.)

At least one venture capitalist says PayPal is the only reason his firm bet on X.com. "We're not a big believer in Internet banks," says Tim Hurd, a director at Madison Dearborn Partners (MDP). MDP led a $100 million round of funding for X.com in March, followed by Sequoia Capital, Deutsche Bank, Goldman Sachs, Idealab, Qualcomm, and Singapore Telecommunications.

The PayPal service is proving to be a big hit, especially among people who participate in online auctions. Half of PayPal's customers use the service for eBay (Nasdaq : EBAY) Web auction transactions.

Since mid-April, X.com has quadrupled its customer base for PayPal to more than 4.5 million members, and that figure is growing by 20,000 new customers per day. Those customers are clearing $6 million's worth of transactions through the system every day, or a little over $2 billion a year.

At present, the company is expected to take in about $8 million in revenue in the fourth quarter, putting it on track to achieve revenues of $32 million a year, Mr. Thiel says.

FOLLOW THE MONEY

X.com makes money from its PayPal service by charging its business customers -- who account for 68 percent of transactions -- a fee ranging from 1.6 to 2.9 percent per transaction. However, the company takes in just one-half of 1 percent for business customers who use credit cards. It does not charge consumers a fee to use the service.

While revenue is growing, X.com is still unprofitable. Its burn rate, or operational costs, are about $6 million per month, according to Mr. Thiel. (Mr. Musk claims the figure is "millions" of dollars less.) To get into the black, the company needs to at least double the transaction volume of its business users next year, Mr. Thiel says.

He adds that once X.com reaches a break-even point, its operational costs will remain fixed, allowing it to garner 20 to 30 percent of each new transaction dollar. To be clear, the company expects to take 20 to 30 percent of every transaction dollar above $4 billion. So, if X.com's transaction volume reaches $5 billion next year, it would grab $200 million to $300 million in revenue of the $1 billion in transactions beyond its break-even point.

To boost revenues and profits, X.com in September began differentiating between business customers and consumers. The company sent official emails to any user clearing more than $500 worth of transactions over a period of six months, stating the individual had to "upgrade" to a pay-per-use business account or cease and desist all dealings. It worked. "Ninety-two percent have upgraded, one-half of 1 percent shut down, and the balance are undecided," Mr. Thiel says.

Its total business customers now number 400,000. X.com hopes to boost that number significantly through a deal (about to be announced) with Intuit. The deal calls for Intuit to bundle PayPal services with its popular Quicken and QuickBooks accounting software. The feature will be available early next year.

WIRE SERVICE HOPES, CREDIT WOES

In other efforts to beef up revenues, X.com has rolled out an email-based international money wire service, in which new investor ING (NYSE : ING) will play a key role. (ING recently put $10 million into the company.) X.com will charge all users around 3 percent per transaction to beam out currency in 26 countries outside the United States. Western Union's fee is typically around 7 percent. "We're going to make a shitload of money on this thing," exclaims Madison's Mr. Hurd.

While Mr. Thiel claims that doubling X.com's payment volume to $4 billion by the end of next year is eminently doable, at least one market research firm's figures indicate that it will be more difficult than he makes out. Jupiter Communications reckons consumer transactions won't hit $8.5 billion until 2003.

An immediate challenge for X.com is to reduce its customers' reliance on credit-card payments from 56 percent of all transactions today to somewhere around 44 percent, Mr. Thiel says. He adds that the company has already cut usage substantially -- it's down from 80 percent of transactions in early September.

The company is taking aggressive steps to cut credit-card use. Last week, it told its business customers that starting in December the fee for credit-card transactions will increase from 2.5 percent to 2.8 percent. The carrot: non-credit-card transaction fees will be cut from 1.9 percent to 1.6 percent.

Credit cards pose a major threat for the upstart because it has to dole out around 2 percent of each credit transaction that passes through the system to banks. That leaves a slim margin of roughly one-half of 1 percent for X.com on business-to-consumer transactions and a negative charge of 2 percent on so-called free, consumer-to-consumer transactions.

In contrast, if customers use X.com's automated clearing house (ACH) features such as electronic check routing, or if they wire existing funds from PayPal accounts, the company gets a free ride, Mr. Thiel says.

BANKS WON'T WITHDRAW

X.com has bigger hurdles to clear than nagging credit-card issues. A formidable crew of brawny competitors are elbowing their way into the online payments space.

One particularly menacing competitor is Wells Fargo & Company (NYSE : WFC), which partnered with eBay in March of this year to offer its own online payment service, Billpoint.

When you consider that half of PayPal's customers reside on eBay, the alliance puts X.com in an awkward situation. "It's like running your own business while your landlord is running a competing business," says Jupiter analyst Jim Van Dyke. "It's a bit scary. They can control your destiny."

Wells Fargo could easily change consumer behavior with a heavy marketing push, Mr. Van Dyke adds. The bank could run advertisements on its ATMs for free.

Wells Fargo isn't the only threat. Yahoo (Nasdaq : YHOO) has inked a deal with the Canadian Imperial Bank of Commerce (NYSE : BCM) to offer a similar online payment service for auctions held on Yahoo. If Yahoo's auctions cut into eBay's market share, X.com would feel the pinch, Mr. Van Dyke says.

So far no one has matched X.com on price, but if competitive pressures force the banks to lower costs -- that is, the fee per transaction -- the upstart could be heading for trouble, Mr. Van Dyke adds.

Thus, Mr. Thiel's orderly path to profitability could become chaotic and his postponed third-quarter IPO could be delayed even longer.

The one thing X.com has going in its favor is its decision to axe its Internet banking operation, which served 50,000 customers.

Despite high marketing expenditures by X.com, Wingspanbank.com, Egg (London: EGG), and just about every other online bank in the consumer market, growth has been stagnant.

The problem: fixed costs remain high even for an Internet operation (this is a continuing problem for the PayPal service), services were unreliable, and consumers were leery about entrusting their savings to virtual banks. The low "marginal cost" philosophy that propped up Internet banks has, so far, proved hollow.

When Red Herring phoned Sequoia Capital's Mike Moritz to discuss the closure of X.com's online banking service, he indicated he was pressed for time. Was there a good time to call back? "Never."

No less than 30 venture capital firms and major corporations elbowed their way into the action, from Amerindo Investment Advisors to Cisco Systems to Soros Private Equity Partners.

It's easy to see why. The market for optical components will exceed $8.6 billion by 2003, according to Ryan Hankin Kent (RHK), a communications market researcher.

As John Day, a longtime optical network analyst and president of Strategies Unlimited, sees it, the transition from copper-based networks to fiber optics and lasers is a bona fide revolution that's comparable to the shift from coal to gasoline.

INTERNET OVERHAUL

Real money is being spent right now to overhaul networks and make them Internet-protocol ready. Consider Cable & Wireless's announcement early last week that it is shifting to an IP-based network courtesy of Nortel Networks. It's a $1.4 billion project for Nortel, which will plan, design, implement, and operate the new network extending throughout Europe and North America.

Nortel, which claims to have a hold on 43 percent of the optical networking market, experienced a 150 percent spike in revenue last quarter for its optical systems division, a spokesman says. The company is projecting the division's revenues to hit $10 billion this year, roughly double that of 1999.

Equally obscene amounts of money can be made by so-called subcomponent companies, which provide the nuts and bolts for the ongoing restructuring effort in the world's telecommunications networks. That restructuring entails a transition from slow and inefficient electronic components to highly efficient and super-fast optical gear.

At Nortel alone, subcomponent sales will reach $2.5 billion by year's end, according to a company spokesperson. (That figure is the retail value of the components. Nortel actually sells most of its equipment to its optical systems business unit.)

AGILITY: CALLING THE TUNE

Agility CEO Ron Nelson, a former vice president at Motorola, makes the bold prediction that by 2004 Agility will post annual revenues of $1 billion.

The company makes lasers that reduce network equipment costs and increase network bandwidth. The high-powered "tunable" lasers fit into dense wavelength division multiplexing (DWDM) equipment and add/drop multiplexor (ADM) gear. That's geek speak for the compression technologies used to squeeze thousands of phone lines onto fiber-optic cables.

Current DWDM and ADM gear use multiple lasers set at different frequencies to squirt separate channels of voice and data over one fiber-optic strand. But multiple lasers make the gear expensive. And carriers have to buy extra lasers as a precaution, in case a particular channel (or frequency) is blocked somewhere along the line. Agility helps solve those problems. The lasers sell for around $1,000 each.

Agility, based in Santa Barbara, California, will use its new funding to ramp up its laser factories in Santa Barbara and packaging facilities in Pennsylvania. By year's end, the company reckons it will be producing more than 1,000 units per week. Arlon Martin, VP of marketing, says he expects Agility to be profitable by early 2002.

The company previously raised venture capital of $15 million. The new round of funding was led by Worldview Technology Partners. The other investors are Dell Ventures; Mustang Ventures; Amerindo Investment Advisors; Berkeley International Capital; Meritech Capital Partners; Morgenthaler Ventures; and U.S. Venture Partners. Private investor Milton Chang also chipped in.

CYOPTICS: THE NEED FOR SPEED

Like Agility, Cyoptics aims to lower equipment costs, albeit through a different strategy. It makes optical components out of indium phosphide, a semiconductor material, to create highly compact devices, designed to reduce the space and power requirements of high-performance optical equipment. Cyoptics claims its products enable carriers to achieve transmission speeds above 40 Gbps while increasing transmission distances.

Cyoptics raised $57 million in a second round loaded with corporate backers. Cisco led the round, which included Corning; Intel Capital; Vitesse Semiconductor; Jerusalem Venture Partners; SCD; Soros Private Equity Partners; The Sprout Group; Innovacom; Natexis; and Eurofund.

While Cyoptics and Agility use signaling technologies to boost network equipment performance, Wavesplitter Technologies uses amplification techniques. It makes passive optical components that further increase the power of optical signals passing through erbium-doped fiber amplifiers (EDFAs), DWDM, and Raman scattering gear. In case you're wondering, EDFA and Raman scattering equipment help to amplify optical signals in long-haul and metro-area networks. That's important because by boosting signal strength, Wavesplitter's equipment may cut the amount of EDFA, Raman, and other gear deployed throughout the network to counteract signal degradation. The company began shipping products to Corning, Corvis, and Lucent Technologies in December.

The new venture round will be used to ramp up production, research and development, sales, and customer support.

The VC round was its sixth. It was led by Thomas Weisel Partners and included J. & W. Seligman & Company; Corvis; NEC; Kalkhoven Pettit Levin Ventures; Mayfield Fund; China Development Industrial Bank; NIF Ventures; and Star Ventures.

One day after it announced a new round of $51 million, Wavesplitter registered to go public and raise $115 million.

IT'S ALL ABOUT THE VALUATION

Even though the subcomponent startups are swimming in cash, that doesn't mean their investors aren't pouring it on a little too thick.

"The impressive capitalization of these [optical subcomponent] companies astonishes me," says Mr. Day of Strategies Unlimited. "These are good companies, but with the valuation they're getting I have to shake my head."

Mr. Day points out that VCs are in it for the valuation. As long as public markets will give it to them, they'll keep hatching companies.

"If they can buy a small business growing rapidly and get a billion-dollar market cap, then QED [quod erat demonstrandum], it's there," he cracks.

Discuss networking, communications, and optical technologies and trends in the Network Talk discussion forum, or check out forums, video, and events at the Discussions home page.

But after Cisco recently broke the silence about its Monterey Wavelength router -- announcing that Worldcom and Petronet were testing the ware -- the question is, did they spend the money on the right thing?

The Monterey product appears to substantially overshoot the immediate bandwidth needs of the Internet backbone, and it doesn't address more pressing issues carriers face at the edge of the network and metro area today.

BUMPING UP THE BACKBONE

Here's some background. The "backbone" metaphor implies the network core is a continuous piece of fiber threaded across the country. That, of course, is not true. For a given transcontinental network, there are typically five to eight metropolitan locations -- called SONET rings -- with separate pieces of dense wavelength division multiplexing (DWDM) equipment, physically tied together like a giant, complex daisy chain.

A Wavelength router (which is roughly the size of four refrigerators) sits at the junction point between the SONET rings, where separate DWDM gear meets in the long-haul network. The router automatically ties together the laser ports on the DWDM equipment, and ultimately could enable carriers to build mesh networks, which are more efficient than SONET rings.

The automated part helps today, because right now, a carrier has to send out technicians to physically connect each DWDM port. That's a costly operation (employees count for half the cost of running a network), and it's becoming more complex. So the automated aspect of the router means Cisco is on the right track.

But in reality, the Wavelength router solves backbone problem carriers will face five to ten years down the road. The current long-distance networks are running smoothly and face few bottlenecks. Carriers face far more pressing problems in the metro area network, where almost all the traffic is centered.

SLOW HANDOFF

Carriers run into some nasty issues in these areas, partly because the super-fast backbone network runs into the much slower networks (1.5 MBps, in general) used by companies inside the SONET rings. Worse, different companies use different transport protocols to run their networks; these include IP, of course, but also frame relay, asynchronous transfer mode (ATM), and time-division multiplexing (TDM). At some point, that disparate traffic is delivered to a carrier's central office for handoff to the network core.

Therein lies the problem.

Carriers can't operate independent backbone networks to transport the different protocols; it's just too expensive. So it's imperative that they find a way to aggregate and collapse the traffic into one or two different protocols, such as IP or ATM, for the handoff to the long haul.

When you talk to the service providers, says Baker Capital general partner Ed Scott, their concern is with finding equipment that can distinguish and prioritize different types of traffic, such as voice, video, or data, and convert them into one or two formats for backbone delivery. That type of functionality will enable carriers to offer a higher quality of service as well as new lines of services that basically are not feasible today.

"It's a huge, huge, problem," Mr. Scott says. "The whole VC community has gone metro core gaga. But how many metro core box companies do you need?"

A DIFFERENT PROBLEM

So rather than focusing on a distant problem for the network core, Cisco should be looking at issues in the metro and network edge. Until those problems are solved, "VCs are way out ahead of reality of networks," with products like the Wavelength router, Mr. Scott says.

Cisco seems to be getting the signal. The company moved into the market for network edge aggregation gear in May, when it acquired Swedish optical equipment maker Qeyton Systems for $800 million in stock.

Qeyton (pronounced kee-ton) makes DWDM equipment for metro area networks. Its equipment operates at more than one frequency simultaneously, which means it can increase fiber capacity more cheaply than long-haul DWDM gear. But the Qeyton product doesn't support all of the disparate protocols found on a metro area network, notably TDM.

That means big carriers will still be lacking a way to aggregate all of their signals onto the long haul via one box, which in turn probably means Cisco will need to buy again to break down the doors of the telecom market.

Discuss networking, communications, and optical technologies and trends in the Network Talk discussion forum, or check out forums, video, and events at the Discussions home page.

As big as the investment is, it fits with the stampede-like frenzy of private fundings in the communications space. VCs invested $3.5 billion in 165 comm companies in the second quarter, more than double the $1.6 billion invested in 99 deals in the same quarter last year, according to VC market research firm Venture Economics. The average deal size has shot up to $21.2 million, from $16.6 million.

Why would VCs make such big bets? "They want to be the 'firstest' with the 'mostest,'" says Jesse Reyes, managing director of Venture Economics. "They're really loading up the poker table with $100 million-plus deals. They feel like they have to buy the table."

Although VCs say they need to invest huge dollar amounts in communications deals because the capital requirements are so large, Mr. Reyes says there is "definitely some valuation fluff in these deals."

LONG-TERM: SHORTSIGHTED?

GMN is pursuing what some might call a high-risk strategy: selling long-term leases, or so-called indefeasible right of use (IRU) agreements, for dark fiber to communications carriers, Internet service providers (ISPs), and large businesses. The company is pursuing the most basic strategy to get into the metropolitan fiber game. It's up against two other approaches.

The most popular approach is leasing dark fiber from a competitive local exchange carrier (CLEC) or other telecom company, and "lighting" it up with communications services. Yipes and Telseon have taken that tack. Another approach is to lay the fiber yourself and light it with services, like Looking Glass Networks and CoreExpress are doing.

GMN is the only startup pursuing the plain vanilla strategy. By taking that approach, it puts itself up against a horde of established and deep-pocketed telecoms that have had fiber in the ground for years. It also competes with Metromedia Fiber Network, a publicly traded company with a $17 billion market cap (but no profits yet).

Based on interviews with executives from GMN, its competitors, venture capitalists, and analysts, the services approach -- whether a company installs or leases its fiber -- holds the most promise.

Services can range from tying together separate business locations with high-speed LAN connections -- using fiber and gigabit Ethernet -- to offering ultra high-speed Internet access of 100 Mbps or more and even providing voice-over IP services. Such services would significantly increase the value of GMN's network, and provide the added revenue it needs to survive as the market becomes commoditized.

"They can and should light the fiber they own with services," says AndrewCray, a senior telecommunications analyst for market researcher Aberdeen Group. "In the long term, providing services rather than raw infrastructure is the only way to make money. The infrastructure is really becoming a commodity."

Tony Abate, a general partner with Battery Ventures, agrees. That's why Battery and Madison Dearborn Partners bet $200 million on Looking Glass Networks, which is playing both sides of the metro access game by providing both "lit" services to companies like ISPs, application service providers (ASPs), and digital subscriber line (DSL) firms, and dark fiber to CLECs and Baby Bells.

INTO THE LOOP

Despite what critics say, Doug Hudson, GMN's president and chief operating officer, maintains that his company is in fact taking the right approach. And, of course, GMN's backers believe it is, too.

The $240 million came from a veteran group of communications VCs. The round was led by Columbia Capital and Providence Equity Partners, with additional funds coming from Alta Communications, Telcom Ventures, and Spencer Trask.

Mr. Hudson, the former president of ACSI Network Technologies, a third-party contractor that lays fiber for carriers, pooh-poohs the notion that fiber is a commodity in the metro area. "Once you get inside the city limits, it's like an eight-lane highway running into one," he says.

To illustrate the point, as president of ACSI, Mr. Hudson says, he built his own fiber loop to experiment with market uptake. "Everybody told me not to deploy fiber in Atlanta," he says. (The assumption was that Bell South had the city wired to the teeth.) "I put in a 98-strand, 100-meter loop to test the water and sold 100 percent of it before I had it in the ground."

Mr. Hudson claims there's tremendous demand on the part of DSL providers, ISPs, and CLECs to have long-term fiber leases. In communications lingo that makes them "facilities based," giving them an added financial advantage. By leasing the fiber rather than building it out themselves, startups can write off the lease as an operating expense, Mr. Hudson says. That makes a balance sheet look more attractive.

Mr. Hudson claims GMN has already sold a "significant" portion of the company's 864-count fiber (a fiber-optic cable is made up of individual glass strands that can be sold one at a time) in Vienna and Berlin, though he admits he won't see his capital costs recouped until GMN sells at least 48 to 68 of the 864 strands. After 100 to 300 strands are sold, margins go through the roof, he says.

By 2001, the company plans to have fiber networks operational in ten U.S. and eight European cities. Mr Hudson reckons GMN can cut its time to market by at least two years by pulling fiber through existing conduits in the U.S. "We'll be in business in six months," he says.

GMN also has an advantage because it doesn't compete with its customers -- DSL providers, ISPs, and CLECs, Mr. Hudson adds. "We're not going to be in the services business."

SHALLOW POCKETS?

In the short-term, GMN has the potential to hit lucrative pockets of demand for dark fiber in underserved areas. But those pockets may be small and short-lived.

Prices for dark fiber are falling so fast that CLECs and other communications carriers won't lock themselves into long-term lease deals (20 to 30 years) like the ones GMN is selling. The carriers don't want to get caught in a bad deal.

Indeed, Michael LaFrance, CEO of NewSouth Communications, a Southeastern CLEC, says he won't touch an IRU for dark fiber for fear of being burned. "We've never signed a long-term commitment," he says. "Right now we're paying less than people that signed [IRUs] a year ago. Prices are dropping so fast that we can't keep track."

Still, Mr. LaFrance says, "there's always good demand for local fiber." He reckons that if GMN builds in business areas lacking fiber, such as small cities like Alpharetta, Georgia, it will be able to make a healthy margin.

GMN's nationwide build-out calls for pulling fiber through preлxisting conduits: empty tubes placed in the ground by telcos that anticipated the need for further fiber deployment. That means GMN is rolling out in metro areas that already have fiber services, running the risk of oversaturating the market and pushing dark fiber costs down further.

SQUEEZED BY COMPRESSION

Yet another factor that could put a crimp in GMN's plans is the march of technological improvement. With the performance of optical networking technology doubling every ten months -- almost twice as fast as Moore's Law -- GMN will face the wrath of compression technologies that continually squeeze more mind-boggling amounts of data onto a single fiber strand smaller than a human hair.

One technology, called dense wavelength division multiplexing (DWDM), uses multiple lasers set at different frequencies to squirt separate channels of voice and data over one fiber-optic strand. DWDM can support over 150 wavelengths, or channels, each capable of hauling an astonishing 10 Gbps. That makes a single fiber capable of delivering data streams of over one terabit per second.

So far, DWDM has not been used extensively in metro areas because the multiple lasers it uses make the gear too expensive for local calls. But prices are falling inexorably and rollout of DWDM in the metro network has increased significantly over the past year.

So called "ultra" DWDM technologies being developed by Bell Labs have already been demonstrated with 1,000 separate channels, using a single laser to generate each frequency simultaneously. If successful, the single-laser techniques will make the equipment more affordable and boost the capacity of existing fiber by multiples heretofore unimaginable.

With the pressures of compression technologies driving down transport prices and boosting fiber capacity, it looks like GMN margins will be cut thin.

The advancements in technology and the competitive landscape are not lost on Matt Newton, a partner with Columbia Capital. "We have the flexibility to strategically extend our business plan," he says, in what appears to be a concession that GMN may ultimately get into services. "There are lots of combinations possible [for service offerings]," he says.

Discuss networking, communications, and optical technologies and trends in the Network Talk discussion forum, or check out forums, video, and events at the Discussions home page.

It isn't surprising. Changes in technology are driving monster purchases of equipment, and startups are cropping up like cold callers to meet that need. This has created a frenzied environment in which too much money is chasing almost every deal. Both VCs and entrepreneurs have to be careful not to let their exuberance get the best of them and end up with hung-up deals.

COOL BILLIONS

To give you an idea of how big the opportunity is, try this on for size: In 1998 Spectrum put up $50 million as part of a group of VCs that paid $350 million for American Cellular, a Schaumburg, Illinois-based wireless startup. One year and a few months later, the firm was bought by AT & T and Dobson Communications for $2.4 billion. The venture capital investors walked away with a cool $1 billion, says Brion Applegate, managing general partner of Spectrum.

But Spectrum is not the only VC raking in profits. Just three deals in Battery Ventures's fourth, $200 million fund brought the firm returns that exceeded committed capital by 15 times, or $3 billion. The firm put $8 million into Akamai Technologies that's now worth $1.2 billion; $8 million into Qtera (bought by Nortel Networks) that's now worth $1.6 billion; and $7.5 million into Allegiance Telecom that's now worth $200 million, says Todd Dagres, a Battery general partner.

Entrepreneurs are on the receiving end of VC exuberance. The latest round of $40 million for Astral Point Communications was oversubscribed by four times, says Raj Shanmugaraj, CEO of the optical networking startup. "There were a lot of inbound calls," he says. "We didn't leave the office."

Likewise, Amber Networks went looking for $60 million and received offers for $100 million. It ended up taking $91 million from a host of brand-name investors. And on Monday, CopperCom, which makes technology to send voice over IP networks, announced that it had nailed down $90 million -- $40 million more than it set out to raise.

Says Denis Pomroy, CopperCom's chief financial officer, "We had some people coming in late in the round who wanted to do due diligence and we told them to just forget it. It was a good position to be in." A total of 12 VCs invested in the 3-year-old company, including lead investors Technology Crossover Ventures and Charter Growth Capital.

WHAT DO YOU DO WITH A DRUNKEN SAILOR?

Mr. Applegate says the climate has become "intensely competitive" for communications equipment deals. With all that new cash flooding into the communications space, entrepreneurs need to make sure they don't get overzealous about first-round valuations and end up with "dumb money," say veteran communications VCs.

"There's a lot of mentally challenged money out there that would love to invest in early-stage deals," Mr. Dagres says. "But what do those VCs have to offer you?" He goes so far as to say that if an entrepreneur takes money from "drunken sailor VCs," Battery doesn't want any part of the deal.

It's understandable why VCs are drunk with enthusiasm for the communications sector. It's tied with health care for the claim of being the largest chunk of the U.S. economy, says Baker Capital founding partner John Baker. W.R. Hambrecht & Company estimates that communications services companies alone spent more than $73 billion on networking equipment last year, up 30 percent from 1998, with no signs of abating.

Couple that with advances in technology that are slashing the price of voice and data transport -- forcing carriers to buy more cost-saving equipment -- and you have one hell of an investment opportunity.

No doubt. There's a brain-smashing paradigm shift on the way, and it's all in the cost structure of hauling voice and data packets over networks. The cost of transport over the backbone will plummet 100- to 1,000-fold over the next five years, Mr. Baker predicts.

BANDWIDTH BROUHAHA

Nobody knows what those kinds of price changes will do to bandwidth demand, but it almost certainly means accelerated use of the Internet and all other communications networks. We're already seeing signs of things to come: last week Enron, a natural gas and energy provider with a nationwide network of "dark" fiber, partnered with Blockbuster to deliver digitized videos to consumers over its network of unused optical fiber.

The precipitous fall in bandwidth prices won't come without a price. The entire legacy circuit-switched communications network used by Ma and her Baby Bells has to be upgraded. "There are 1 billion land lines connected to the global network, and there will be 1 billion wireless connections within the next couple of years," Mr. Baker says. "Upgrading that network to broadband capabilities will cost at least $1 trillion. That's why every banker, VC, and investment business has to at least have an opinion as to whether they're going to participate."

The whole situation has created a frenzy of investment activity in telecom upstarts. Everyone wants in, and that's driving up valuations. Since the market went sour on e-commerce early this year, there's plenty of dumb money available to chase telecom upstarts. Still, entrepreneurs should be wary of cash-flush VCs bearing the gift of huge valuations.

"We're not going to compete on valuation, we're competing on value add," Battery's Mr. Dagres says. He says his firm works intensely with entrepreneurs to develop their business plans and introduces them to potential customers and partners. Apparently that works: Over the past couple of years, Battery has maintained an astonishingly low 10 percent failure rate among its portfolio companies.

SYMBIOTIC STRATEGY

Mr. Applegate says Spectrum sets itself apart from noncommunications-centric VCs by creating a keiretsu-like environment of complementary portfolio companies. Half of its companies are communications services firms, one-quarter are in communications hardware, and one-quarter are software plays. That enables the equipment vendors to work with services firms to develop the right kinds of products. Spectrum's companies also sell products to each other. "Our service providers will purchase between $2 billion and $3 billion [from portfolio equipment companies] this year alone," he says.

Astral Point's Mr. Shanmugaraj kept those considerations in mind during each round of funding for his company. "There was a lot of smart money out there, but some of it was just looking for the next biggest thing," he says. "We looked at what they could bring to the firm."

That strategy has rewarded Mr. Shanmugaraj with progressively larger valuations with each new round. Astral Point's valuation is now 50 times higher than it was when the firm first went to the table.

Though Mr. Shanmugaraj is bullish on the telecom sector's prospects for returns, he is skeptical that it will go on indefinitely. "There's only so much innovation a market can take," he says. "We'll go on for a little while, but in three years it will be a different space."

Discuss networking, communications, and optical technologies and trends in the Network Talk discussion forum. Or check out forums, video, and events at the Discussions home page.

In the past four months, VCs have poured more than $500 million into at least five other companies in the space -- Looking Glass Networks, CoreExpress, Telseon, SmartPipes, and Yipes. And all of the upstarts have two things in common. They're all trying to subvert Baby Bells in the business of metropolitan area data access, and they all sell to the same customers -- small- and midsize businesses or Internet service providers.

At least one of the companies' founders has no illusions about the challenges that lie ahead. "Competitors? You bet, man -- from AT & T to MCI to Sprint to the Baby Bells," says Scott Ticer, cofounder and VP of business development at Airband.

STRINGING THE SEQUOIAS

The fact is that selling high-speed Internet access services to bandwidth-starved business is a commodity business. There's enough fiber in the ground to string around the Giant Sequoias in Northern California a hundred times over, and microwave communications have been used for transporting voice calls for years. As with every other sector of the communications market, transport costs continue to fall through the floor as technology advances. That means both firms are vulnerable to price wars that rip into margins. And because both Cogent and Airband are focusing exclusively on data access services, there's little room for recourse through differentiation. That sounds a lot like a true dot-com debacle, but investors continue to pony up.

Cogent Communications and Airband are entering the battle with two very different delivery models. Cogent is taking an all-optical approach, whereas Airband is going with a microwave-based wireless one.

Cogent, based in Washington D.C., received its second-round funding from lead investor Oak Investment Partners and co-investors Broadview, Worldview Technology Partners, Nassau Capital, Texas Pacific Group, and others. The funding brings Cogent's total equity raised to $116 million.

Through a $280 million financing agreement with Cisco, 12,400 miles of long-haul fiber from Williams Communications, and 5,000 miles of local fiber leased from MetroMedia Fiber Networks, Cogent is a taking an all-optical approach to service delivery. The company uses optical gear that Cisco acquired when it bought Cerent and Pirelli Optical Systems. "We're building a data network from the core out," boasts Cogent CEO Dave Schaeffer. "There's no voice, no ATM [asynchronous transfer mode], just pure IP over DWDM [dense wavelength division multiplexing] infrastructure."

CUTTING COSTS

By cutting an entire layer of voice-switching equipment out of the equation and adding other efficiencies in data transport, the architecture enables the company to cut bit transport costs down to about half a cent per mile, Mr. Schaeffer claims. That's less than the 1-cent-per-mile cost of renting a line from the phone company, he says.

The low cost enables Cogent to drill down on its core business plan: offering 100 megabit-per-second (Mbps) dedicated Internet access to businesses in "class-A" office buildings (those with 500,000 square feet or more) for a flat rate of $1,000 per month. No contracts. Just a dedicated, pure, clear connection to the backbone network, says Steve Bachmann, a general partner at Broadview Capital Partners.

Cogent's network is currently under construction, but service will be available in some of the nation's largest "retail" markets, including New York, Philadelphia, and Chicago by November 1 of this year, Mr. Schaeffer says. Cogent a plans to roll out to a total of 20 markets where it will sell "wholesale" bandwidth on its network to carriers, ISPs, ASPs, and other large-bandwidth users. Cogent can't run its network at capacity with retail customers alone, he admits. "We need to have a way to monetize other fiber to create revenue."

Even so, Mr. Schaeffer is very upbeat about his company's prospects. He says Cisco has a vested interest in seeing Cogent find success. "We're building a model network for Cisco," he says. "I met with John Chambers, and our networking architecture looks exactly like what Cisco wants for the future. It justifies why Cisco spent $11 billion on buying optical networking companies like Cerent and Pirelli."

Carl Russo, group VP of optical networking for Cisco, is bullish about Cogent. "We love the simplicity of its model. It's either a yes or no sale. 'Do you want 100 megabits per second or not?'" he says.

Still, Cogent will also have to contend with competition from the air -- Airband, that is. Airband execs declined to disclose the specific amount of the venture funding they'll announce on Monday, but a source at Battery Ventures, one of the company's backers, says the round is "substantial." Airband took in $5 million in seed funding early this year from Sevin Rosen Funds and Crescendo Ventures.

MICROWAVE IT!

By using the same microwave technology that carriers used for 10 to 15 years to transmit voice, AirBand beams out data. The company sets itself apart because "there is not one technology that answers every customer's needs in terms of availability and affordability," says cofounder Mr. Ticer.

Using wireless technology only began to make economic sense within the last four months. It was no coincidence that that's when he and three other founders from Adaptive Broadband, Covad Communications, and NextWave, broke ground with the company.

AirBand sells from 1 Mbps to 10 Mbps worth of dedicated Internet access starting at $349 per month and going up to $2,995. The company has service level agreements comparable to private line or DSL, Mr. Ticer says.

Mr. Ticer is not oblivious to the fact that Airband will have to run hard to outpace its competitors. "The broadband service space is an absolute, unequivocal free for all," he says.

Both Airband and Cogent have critics who wonder how the startups will make it over the long haul. "How on earth are [they] going to make money?" asks Promod Haque, managing partner at Norwest Venture Partners, which has backed Yipes, an Airband and Cogent competitor.

He reckons that bankruptcies are on the horizon for some of the companies in the crowded space, unless they can find other value-added services to sell to their business customers. "We learned our lesson with Verio," he says. "Connectivity gets commoditized very, very, very, quickly. Therefore, when you build your business, you want to make sure you know that access will be a commodity."

After two years selling plain, high-speed data access to its customers, Verio realized that money wasn't going to be made on access, Mr. Haque says. So it started offering value-added services, such as Web hosting, domain name registration, electronic commerce services, and application-hosting services. Mr. Haque, the lead investor in Yipes, another optical connectivity firm, says he constantly challenges the startup's executives to come up with new services, but he's tight lipped about what they will be, noting that he doesn't want to tip off competitors.

Peter Wagner, a general partner at Accel Partners, and one of the premier VCs in the telecom space, agrees: "Bare bones Internet access is a good model to get started, but you need to have a vision of the value-added data services you're going to provide."

So what happens to the broadband providers that don't make it? They won't have the numbers to go public, and it's unlikely that they'll be bought out by competitive local exchange carriers and incumbent local exchange carriers. Because the broadband providers will likely be losing money, shareholders of CLECS and ILECS will disapprove of a purchase because it will hurt earnings per share, Mr. Wagner says.

Additional reporting by Phil Harvey.

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DEALFLOW DASHBOARD/ July 12

B2B: Ceon, $29MB2C: Goodhome.com, $30M; Blackstar, $9.1M;SOFTWARE: Venturcom$17.6MWIRELESS: Airprime, $16.5M COMMUNICATIONS:ICO-Teledesic, $1BINCUBATORS: Gorillapark, $28MDEALFLOW DIGEST: Marketfusion, $20M; Harmonycom, $7M; eFinance, $12M; Unplugged Games, $1.2M; Textrade, $10M; Worldtrak, $5M; Tealeaf Technology, $18.5M; Elauncher, $753K; Metaserver, $25M ELEVATOR PITCH: Videometro, $300K

DEAL OF THE DAY: SUNESIS PHARMACEUTICALS, $60M

When two proteins bind together that are not intended for marriage, the results can be disastrous. These so-called protein-to-protein interactions are responsible for a litany of disorders -- from rheumatoid arthritis to cancer.

If you can find a cheap and non-intrusive way to stop the interactions, you will not only save countless lives but you will create a pharmaceutical gold mine. That's exactly what Sunesis Pharmaceuticals has done, says Steve James, the company's senior VP of business operations. And that's why seven major investors pumped $60 million into the company, based in Redwood City, Calif. The third round follows $34 million in prior investment.

Here's how it works: when proteins bind, they don't stick together perfectly. There are small gaps between them. Sunesis has figured out how to use small organic molecules to seek out unwanted connections and break them by getting between the proteins. Because the treatment uses small molecules, it can be taken orally, Mr. James says. Sunesis plans to sell drugs directly and partner with other pharmaceutical firms. It also plans to engage in joint development agreements with biotech firms.

As with any biotech investment, Sunesis won't see any payoff for some time. It's testing an asthma drug, which it expects to get into human trials within three years. Regulatory approval would be another three to five years out.

INVESTORS: CSFB Private Equity (lead); E.M. Warburg, Pincus & Co.; Mayfield Fund; Venrock Associates; Abingworth Management; International Biotechnology Trust; Lombard Odier & Cie; individual investors.

B2B

CEON www.ceon.com Redwood City, CA FUNDING: $29M PRIOR FUNDING: $34M ROUND: 3rd CATEGORY: B2B DESCRIPTION: Allows broadband service providers to bundle and deliver communications and entertainment services to consumers and businesses over cable, xDSL or wireless networks.LEAD INVESTOR: THK ($5M) OTHER INVESTORS: Accel Partners, BEA Systems; ANTEC; Portal Software; THK; Sutter Hill Ventures; Tech Crossover Ventures; and Berkeley International. THE HERRING TAKE: When Ceon launched last year it had trouble attracting venture funding because "the VC's didn't know what we were producing," CEO Tim Fritzley says. Based on the heavy-hitters in the third round, the VCs have since figured it out. Mr. Fritzley, a GTE and Tellabs veteran, wants Ceon to be the industry leader in networking software that allows companies to bundle voice, video, and data into a package that can be sent over broadband and wireless networks. Mr. Fritzley says he's lined up an impressive array of clients but he can't name them because "they want everything to be bulletproof before making any announcements." He also claims that some IT giants have made overtures to acquire the company, but for now at least, he's not interested. The 169-employee company has a monthly burn-rate of $2.2 million, so the new round should last at least a year. Ceon plans to use the money for marketing and expansion.

B2C

GOODHOME.COMwww.goodhome.comSan Rafael, CAFUNDING: $30MPRIOR FUNDING: $30MROUND: 2nd CATEGORY: B2CDESCRIPTION: Offers home decorating services online, as well as products such as furniture, fabrics, and upholstery.LEAD INVESTOR: Rhodes PartnersOTHER INVESTORS: Homestore.com; Thomas H. Lee & Co.; The Hearst Corp.; Weston Presidio Capital; MarchFIRST; Slifer Design.THE HERRING TAKE: Goodhome.com may be an Internet company, but it has an old-fashioned business model: it makes money from the gap between what it charges customers and what it pays manufacturers. In the future it might charge for licensing its home decorating technology to non-competitive companies. CEO Doug Mack says he has little competition. A shakeout in the B2C space has left about four companies, down from as many as 20 a year ago, he says. GoodHome.com has helped with the consolidation by acquiring two companies -- FurnitureFind.com and nHabit.com. But Mr. Mack still faces competition from Furniture.com, HomePortfolio.com, and Living.com. The upside is that the home furnishings market will reach $13.6 billion in 2004, according to Gomez Advisors. Mr. Mack says the company generates revenues of "well over a million a month." He expects the new funding to last to the end of 2001, or about 18 months. The company will use the investment to develop its home decorating technologies, and to build up its customer service and marketing functions.

BLACKSTARwww.blackstar.co.ukBelfast, Northern IrelandFUNDING: $9.1MPRIOR FUNDING: $6MROUND: 2ndCATEGORY: B2CDESCRIPTION: Sells DVDs and videos online.LEAD INVESTOR: Atlas Venture and Tarrant Venture.THE HERRING TAKE: Never mind that e-tailers are falling like flies in the States. CEO Darryl Collins, a film producer for 17 of his 40 years, believes he can make a go of it in the U.K. His 2-year-old Blackstar claims to be the largest online video and DVD retailer in the U.K. It has customers in more than 140 countries, and its quarterly revenues (currently $3 million) are growing by about 60 percent each quarter, Mr. Collins says. He wouldn't disclose his burn rate, but he says he expects his 120-employee company to profitable by the end of next year. He's hedging his e-tailing bet with plans to offer features such as TV and movie listings through WAP mobile phones. And he's trying to partner with telcos and mobile phone companies to deliver streaming video as well as video-on-demand. If Blackstar tanks, it would make a tasty morsel for Amazon.com's U.K. operation, or perhaps major U.K. music retailers such as Virgin or HMV.

SOFTWARE

VENTURCOMwww.venturcom.comCambridge, MAFUNDING: $17.6MPRIOR FUNDING: $9MROUND: 3rdCATEGORY: SoftwareDESCRIPTION: Provides real-time and middleware technologies for embedding Windows NT and Windows CE in medical and industrial equipment.LEAD INVESTOR: GE EquityOTHER INVESTORS: Ascent Venture Partners; Envest Holdings; First Analysis Venture Capital; Intel Capital; Massachusetts Technology Development; Microsoft; Waterside CapitalTHE HERRING TAKE: By VC standards, this company is ancient. Venturcom was founded in 1980 by four MIT grads in the days when Jimmy Carter was in the White House and Leonid Brezhnev was in the Kremlin. Venturcom president and CEO Michael Dexter-Smith transformed the firm from a UNIX-based middleware-consulting firm with 50 customers to a Windows NT-based middleware software firm with 1,000 clients worldwide. The company now sells an NT-based API development tool. The tool enables medical device and industrial equipment makers to run NT without rotating media (i.e. hard disks) and with guaranteed response times between the OS and hardware. Those features enabled Litton Marine to use Venturcom's software to control the rudders on U.S. Navy destroyers. Interestingly, Mr. Dexter-Smith is not running the company at a profit. It's more important to develop the company aggressively and go after the market, he says. An IPO is expected next year.

WIRELESS

AIRPRIME www.airprime.com Santa Clara, CA FUNDING: $16.5M PRIOR FUNDING: $3.6M ROUND: 2nd CATEGORY: Wireless DESCRIPTION: Makes wireless modems LEAD INVESTOR: Techharvest OTHER INVESTORS: LSI Logic; Ideal Venture Partners; Belgravia Capital Partners; Crossfire Ventures; Libertyview Capital; The Angels Forum; The Halo Fund; Pointwest Capital; and CEO Paul Sethy ($1M over two rounds) THE HERRING TAKE: "We had the perverse pleasure that the stock market collapsed when it did, because now we're sticking out like a sore thumb," says Airprime founder and CEO Paul Sethy. His company, 40 employees strong, makes wireless modems that allow computers, cell phones, PDAs, and other products to talk with each other. The talkative CEO expects sales to hit $250 million within a year. He also says VCs are lined up to provide him with another $80 million. Mr. Sethy, who ran a variety of ops at Verifone before his new venture, makes the wild prediction that he'll bury competitor Metricom, maker of the Ricochet wireless modem. Mr. Sethy claims he'll be able to piggyback his technology on devices that run on Sprint PCS, US West and Horizon. The secretive Mr. Sethy declined to disclose his burn-rate.

COMMUNICATIONS

ICO-TELEDESIC www.teledesic.com London and Bellevue, WA. FUNDING: $1B plus ROUND: Seed CATEGORY: Communications DESCRIPTION: Wants to build a global satelitte system for wireless communications. LEAD INVESTOR: Eagle River Investments ($500M) OTHER INVESTORS: Clayton, Dublinier and Rice ($350M), Bill Gates ($100M); Subhash Chandra, Burtington Resources and other Angels. THE HERRING TAKE: "Craig McCaw believes that you will launch no constellation before its time," says Bob Ratliffe, a McCaw insider and VP of Eagle River Investments, an arm of McCaw and company. He was speaking of Mr. McCaw's ambitions to launch a series of communication satellites under the umbrella of ICO-Teledesic to provide the globe with a comprehensive wireless infrastructure. This is no typical venture deal and by no means the last round of funding, cautions Mr. Ratliffe. Mr. McCaw, who made a vast billion-dollar fortune with his cellular phone networks, wants to incorporate the bankrupt ICO into his Teledesic corporation, and has paid over $2 billion to do so. That deal is pending approval from the respective boards and should be decided soon. ICO, if you'll recall, went belly up last year at about the same time as Iridium, Motorola's failed attempt to build a comprehensive cellular network from space. The initial satellites for the ICO-Teledesic launch, 12 of them built by Hughes and sitting in their Redondo Beach, Calif. warehouses, aren't scheduled to fly until 2004. Not a bad seed round by any means.

INCUBATORS

GORILLAPARKwww.gorillapark.comAmsterdam, The NetherlandsFUNDING: $28MPRIOR FUNDING: $13MROUND: 2ndCATEGORY: IncubatorDESCRIPTION: Provides e-commerce startups with seed funding and services including financial, legal, strategy, product development, marketing, customer service IT and human resources, in return for a stake in each of its portfolio businesses.LEAD INVESTOR: Cable & WirelessOTHER INVESTORS: ABN Amro; Atlas Ventures; Deutsche Bank; Goldman SachsTHE HERRING TAKE: When funding for an incubator comes from a tech or telecom company, like Cable & Wireless's $28 million lead commitment to Amsterdam-based Gorillapark, there's usually more than money at play. Sure enough, this deal is mainly in-kind services, not cold cash. The incubator, which has set up offices in five European cities, will get such C & W services as Internet and telephone connectivity, Web hosting, and co-location space for its servers. Moreover, the "Gorilla babies" also stand to benefit from U.K.-based C & W's strong European and Asia-Pacific presence as they eye international expansion, says Gorillapark's chairman and CEO, Jerome Mol. The deal blows new life into the floundering European incubator sector, making Mr. Mol optimistic that he'll reach his target of 30 chimps at Gorillapark by year-end, from around 10 today. If you want to get into the pack, send your pitch to info@gorillapark.comMORE INFORMATION: Gorillapark

DEALFLOW DIGEST

MARKETFUSION www.marketfusion.com FUNDING: $20M CATEGORY: B2B/B2C DESCRIPTION: Offers procurement of custom production materials via the Web for high-tech manufacturers. LEAD INVESTOR: Doll Capital Management ($8M) OTHER INVESTORS: Walden International Investment Group ($6M); Ridgewood Capital; Infocomm Development Authority; Sterling Payot Capital. MORE INFORMATION: Marketfusion

HARMONYCOMwww.harmonycom.comAnn Arbor, MIFUNDING: $7MROUND: 2ndCATEGORY: SoftwareDESCRIPTION: Develops and sells broadband service delivery software to service providers.LEAD INVESTOR: Cisco SystemsOTHER INVESTORS: Iscal Holdings (Israel); Yozma Venture Capital (Israel); ComSor Investment Fund (Israel); Pino Investment Partners (Italy).

EFINANCEwww.efinance.comSunnyvale, CAFUNDING: $12MROUND: 1stCATEGORY: B2BDESCRIPTION: Provides automated online credit delivery and fulfillment for exchanges, marketplaces, vendors, portals and other e-commerce companies.LEAD INVESTOR: The Sprout GroupOTHER INVESTORS: NIF Ventures USA; Digital Ventures MORE INFORMATION: eFinance.com

UNPLUGGED GAMES www.ungames.com FUNDING: $1.2M CATEGORY: Wireless DESCRIPTION: Developing Internet-enabled games for cell phones, PDA's and other wireless devices. LEAD INVESTOR: Alacrity Ventures OTHER INVESTORS: Windcrest Partners; Hudson Ventures; Oak Hill Advisors; and a slew of angels MORE INFORMATION: Unplugged Games

TEXTRADE.COMNew YorkFUNDING: $10MPRIOR FUNDING: $1.5MROUND: 1stCATEGORY: B2BDESCRIPTION: Operates a business-to-business exchange for textile trading.LEAD INVESTOR: ETF Group; Draper Fisher Jurvetson Gotham VenturesMORE INFORMATION: PRNewswire

WORLDTRAKwww.worldtrak.comMinneapolis, MNFUNDING: $5MROUND: 1stCATEGORY: CRM softwareDESCRIPTION: Develops customer relationship management (CRM) software for financial services, manufacturing/distribution, publishing, and online industries. LEAD INVESTOR: Bluestem Capital Partners IIMORE INFORMATION: Businesswire

TEALEAF TECHNOLOGYwww.tealeaf.comSan FranciscoFUNDING: $18.5M ROUND: 2nd CATEGORY: Internet SoftwareDESCRIPTION: Provides software for tracking customer experience on Web sites.INVESTORS: Matrix Partners; Foundation Capital; J.P. Morgan & Co.; SAP.MORE INFORMATION: PRNewswire

E-LAUNCHER Cambridge, EnglandFUNDING: $753,000ROUND: SeedCATEGORY: IncubatorDESCRIPTION: Plans to invest in Internet-related businesses in return for an equity stake in its incubatees. LEAD INVESTOR: ETCapitalMORE INFORMATION: ETCapital

METASERVER www.metaserver.com New Haven, Conn.FUNDING: $25M CATEGORY: B2B DESCRIPTION: Makes business integration software for automated e-business transactions. LEAD INVESTOR: Century Capital Management and Madison Dearborn Partners MORE INFORMATION: Metaserver

ELEVATOR PITCH

VIDEOMETRO, $300Kwww.videometro.comTHE PITCH: "Videometro is an ASP licensing a 'Video Community in a Box' application that adds streaming digital video to Web sites. Revenues are generated directly from our clients in the following areas: licensing fees; maintenance and support fees; integration, design and development fees; hosting and serving fees; referral fees from broadband partners; and sharing advertising and e-commerce revenue. Videometro's target market includes B2B, B2B2C, and local and national portals. Initially, it is seeking $300,000 in seed/angel funding. These funds will be used to complete development and production of Version 1.0a of our vPPEC Tool Set, secure early adopter clients, add strategic partnerships and cover general and administrative expenses for a six month period."WHY WE LIKE IT: Multiple revenue streams, targeting businesses rather than consumers as customers, in search of reasonably sized angel round with clear goals for that cashCONTACT: John Hughes, president, john@videometro.com

(Looking for funding? Drop us a line at dealflow@redherring.com. Let us know who you are, how much you're seeking, the funding sources you're targeting, your contact info, and, of course, your pitch. Please keep the pitch to no more than 100 words. One tip: pretend you're actually pitching a VC in an elevator. Submissions should have "Seeking Funding" in the subject line.)

Dealflow is reported and written by Karie Atkinson, Richard Byrne Reilly, and Steve Silverman.

Have a tip? Drop us a line at dealflow@redherring.com.

Discuss today's Dealflow in the Dealflow forum. Or check out forums, video, and events at the Discussions home page.

TALK TO A REALLY SMART VC -- ANN WINBLAD. Tune intoRedherring.com next Tuesday, July 18, at 1 p.m. PST. She'llbe talking live online with venture capital editor LarryAragon and taking your questions - or as many as she cansqueeze in. Ann keeps a pretty tight schedule, so this is acan't-miss opportunity. The cofounder of Hummer Winblad, Annis one of the smartest VCs in the business. To get in on theaction, go to the Discussions Channel on our Web site orpoint your browser directly to Red Herring discussions and click "Enter arena."

Dealflow -- Intelligence for Entrepreneurs�

DEALFLOW DASHBOARD/ July 6

B2B: Meridian Project Systems, $13M B2C: SportsYa.com, $11M INTERNET SERVICES: Infokall, $2M. COMMUNICATIONS: Ilotron, $10M DEALFLOW DIGEST: Selecterra, $5.5M; Agex, $6.5M; Adfusion, $4.5M; Merlynet, $2.5M; AntFactory Holdings, $150M; Ecommony, $3M

DEAL OF THE DAY: NEWROADS, $65M

Remember how the Internet was going to cut out the middleman? Well, a new breed of middleman is sprouting up, in the form of outsourced Web operations, from Net hosting firms such as Loudcloud and LogicTier, to e-fulfillment and customer service businesses provided by the likes of Fingerhut.

NewRoads, based in Greenwich, Connecticut, falls into the latter category. Even though it will compete with the much larger Fingerhut, NewRoads has already proven it has staying power: its first round of VC, $11 million, lasted four years. NewRoads handles companies' customer interactions -- from supply chain management and order fulfillment, to call centers and data collection services. So far it has signed up about 200 customers including America Online, high-end retailer Abercrombie & Fitch (A & F), Microsoft, Avon.com, and Victoria's Secret. The extent of the outsourcing varies, with Microsoft using NewRoads to handle only its rebate program and A & F outsourcing its entire online customer experience.

In addition to the order fulfillment, NewRoads has set up a curious kind of call center for A & F. The call center, located at an undisclosed university, looks like an A & F store. The goal: to help A & F phone salespeople understand the "lifestyle and image" of A & F's customers, NewRoads's chairman Tony Lee says. In other words: They should know what it feels like to be a Yuppie.

FUNDING: Accretive Technology Partners (lead investor), DB Capital Partners

B2B

MERIDIAN PROJECT SYSTEMS (MPS) www.mps.comSacramento, CA FUNDING: $13M PRIOR FUNDING: None. ROUND: 1st CATEGORY: B2B DESCRIPTION: Internet and software solutions for the architectural, engineering and construction industries. LEAD INVESTOR: Summit Partners OTHER INVESTORS: None. THE HERRING TAKE: CEO and cofounder John Bodrozic looked at his friend David Towert while working on a hospital construction site and said: "What the hell are we doing? Let's start our own company." That was seven years ago. Today their company, Merdian Project Systems, is chugging along nicely. The company's goal is to be a one-stop shop for the commercial construction industry, with MPS focusing on aggregating online the owners, engineers, architects and construction industries. The cofounders have signed up 5,000 customers so far, including Disney and Marriott. Its revenues for 1999 topped $9.3 million. And even though its burn rate is $900,000 a month, Mr. Bodrozic says that's nothing to worry about. "This company was started on credit card debt and people working for free," he says. "We know exactly what we're doing."

INTERNET SERVICES

INFOKALLwww.infokall.com Newport Beach, CA FUNDING: $2M ROUND: 1st CATEGORY: Internet consulting DESCRIPTION: Provides Web site development and call center services.LEAD INVESTOR: Angels, every single one of them, who don't want their name in print. OTHER INVESTORS: More angels THE HERRING TAKE: "If we don't make money in our first year, we'll be in bad shape," says Infokall's candid CEO Vishnu Choudhary. With a monthly burn rate of $150,000, Mr. Choudhary has 13 months to start turning a profit. He's quite confident he'll be able to do it: He put up $400,000 of his own money for the seed round. Infokall provides Web site development and call center services, and integrates legacy enterprise resource planning (ERP) systems with Web-based systems. The company has opened an R & D facility in India, an office in Singapore, and has plans for one in Taiwan. Headcount has grown to 58 people. Mr. Choudhary says the company's revenues come strictly from software sales for the moment. He projects sales of $11 million for the year ended March 2001.

B2C

SPORTSYA.COMwww.sportsya.comMiami, FLFUNDING: $11MPRIOR FUNDING: $21M ROUND: 3rdCATEGORY: B2CDESCRIPTION: Spanish- and Portuguese-language sports portal serving Latin America, Spain and U.S. Hispanic markets. LEAD INVESTOR: Chase Capital PartnersOTHER INVESTORS: IMG/Chase Sports Capital; Flatiron Partners; Ventech; Radio UnicaTHE HERRING TAKE: Several Spanish language sports sites have collapsed in recent months. But SportsYa.com CEO Emilio Romano says he's not worried about his company going the same route. He cites partnerships and content generated by top sports columnists as a competitive edge. SportsYa.com has three revenue streams: advertising and sponsorship fees; a percentage of e-commerce transactions from products and auction items sold over its site; and fees for syndicating its content. Mr. Romano declined to comment on revenues, or SportsYa.com's burn rate. But he notes that the company will announce a follow-on funding in the next few months that will enable it to stay fully funded until it's cashflow-positive.

COMMUNICATIONS

ILOTRONwww.ilotron.comEssex, EnglandFUNDING: $10MROUND: 1stCATEGORY: Optical networkingDESCRIPTION: Develops and supplies optical routing equipment to telecommunications networks.LEAD INVESTOR: 3ITHE HERRING TAKE: The startup is targeting a hot market -- optical networking -- but so is everyone else. CEO Chris Lilly concedes that he has major competition staring him in the face, including large players such as Nortel and Alcatel, mature startups such Corvis and Sycamore Networks, and brand new entrants such as Calient Networks. Ilotron has an agreement with a major European operator as well as with a North American operator to run tests on his equipment. It's counting on Ilotron's technology to set it apart from the pack. It can transport data at up to 1 petabit per second. Translation: You can send the contents of the Library of Congress over its network in the blink of an eye, Mr. Lilly says. He expects to raise a second round of $40 million in the fall. In case you're wondering, Ilotron is Greek for "slave to the machine." MORE INFORMATION: Ilotron

DEALFLOW DIGEST

SELECTERRAwww.selecterra.comChicagoFUNDING: $5.5MROUND: 1stCATEGORY: B2BDESCRIPTION: Operates an online marketplace for adhesives and light industrial materials.INVESTORS: Toucan Capital ($3M) and others

AGEX.COMwww.agex.comSacramento, CAFUNDING: $6.5MPRIOR FUNDING: $3MROUND: 2ndCATEGORY: B2BDESCRIPTION: Provides an online exchange where farmers, processors, wholesalers, and manufacturers can trade agricultural crops.LEAD INVESTOR: Wells Fargo BankOTHER INVESTORS: New Millennium PartnersMORE INFORMATION: Businesswire

ADFUSIONwww.adfusion.comLos Angeles, CAFUNDING: $4.5MROUND: 1st CATEGORY: B2BDESCRIPTION: Operates a business-to-business marketplace for the purchase and sale of advertisements.LEAD INVESTOR: BCI PartnersOTHER INVESTORS: Private investorsMORE INFORMATION: PR Newswire

ECOMMONYwww.ecommony.comNew YorkFUNDING: $3MROUND: 2ndCATEGORY: Internet softwareDESCRIPTION: Develops e-commerce software that enables person-to-person credit card payments for online auctions and other online commerce sites.LEAD INVESTOR: East River VenturesOTHER INVESTORS: Genesis Capital; eXseed; Gemini Capital Ventures

MERLYNETwww.merlynet.comYehuda, IsraelFUNDING: $2.5MPRIOR FUNDING: $1MROUND: 1stCATEGORY: Voice over IPDESCRIPTION: Develops Internet Protocol telephony technologies for Telcos and ISPs.LEAD INVESTOR: Seed Angels Investment TrustOTHER INVESTORS: European Techno Start; private investors.MORE INFORMATION: Businesswire

ANTFACTORY HOLDINGSwww.antfactory.comLondon, EnglandFUNDING: $150MPRIOR FUNDING: $395M ROUND: 2ndCATEGORY: Incubator DESCRIPTION: Incubator for European startups. In addition to funding, it provides a variety of businesses services, including business plan and market analysis, recruiting, and marketing.LEAD INVESTOR: Allianz Capital Partners OTHER INVESTORS: Moore Capital Management; Hopa; GBS Finanzas; Whitney & Co.; Citicorp Venture Capital; CVC Capital Partners.

Dealflow is reported and written by Karie Atkinson, Richard Byrne Reilly, and Steve Silverman.

Have a tip? Drop us a line at dealflow@redherring.com.

Discuss today's Dealflow in the Dealflow forum. Or check out forums, video, and events at the Discussions home page.

Dealflow -- Intelligence for Entrepreneurs™