Back in the nasty '90s, Battery Ventures in Boston was a kingmaker in telecom VC. They returned piles of money to investors by backing "hot box" startups like Qtera, which Nortel Networks acquired in 1999 for an eye-popping $3.5 billion. The hot-box model was simple: get a bunch of engineers together, design a hyped-up box (i.e. piece of telecom equipment), and sell the company to Nortel or Cisco before shipping a product. Then the telecom market crashed, equipment makers stopped buying startups, and VCs slowed their pace of investing. Battery Ventures laid off a bunch of employees and gave the hot-box model a rest.
Until now. The hot-box model is back, but it's been updated. "This may be the hot-box model for 2010," says Carl Stjernfeldt, partner at Battery Ventures. Late last year, Battery led a $15 million third round of financing for Tejas, an Indian maker of optical networking equipment (the name means "bright light" in Hindi). The company's other investors: Intel Capital, Indian VC firm IL&FS, and Sycamore Networks founder Desh Deshpande. Before raising the round, Tejas, which was founded in 2000, had already sold products for four years, shipped three product lines, hired 160 employees, and signed global distribution agreements--all on $14 million in funding.
How did Tejas do it? Not just by using inexpensive labor. The company's model relies on original equipment manufacturers (OEMs)--that is, big companies that slap their brand names on its products, sell them all over the world, and share the spoils with Tejas. The OEM partners sell mainly to customers in Asia, where demand for telecom equipment is stronger than in the U.S. This way, Tejas doesn't have to build a costly worldwide sales and distribution network. However, the company sells directly to customers in its home market, India, where telecom carriers are rapidly expanding their networks.
Tejas will use its newly raised $15 million to expand its OEM partnerships. Stjernfeldt doesn't anticipate the company will raise any more money before it goes public or gets bought. Keep an eye on Tejas to see how the Hot Box 2.0 approach works in the long run.