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TMCNet:  'We're providing building blocks for next-generation communications'

[March 18, 2013]

'We're providing building blocks for next-generation communications'

Mar 18, 2013 (Globes - McClatchy-Tribune Information Services via COMTEX) -- In late February, Jefferies & Company published a comprehensive review on silicon photonics, which uses optical interconnects between processors. The report mentioned companies such as IBM Corporation (NYSE: IBM), Cisco Systems Inc. (Nasdaq: CSCO), and Intel Corporation (Nasdaq: INTC). The report predicts that the ability to use optical interconnects for data between processors will be available by 2020.

As fate would have it, a few days later, Israeli start-up Compass-EOS Ltd., which Jefferies did not mention, lifted the veil behind which it had operated for six years. It turns out that this optical connectivity already existed in 2012, and that four customers already run the company's product -- the world's first silicon photonics router for the most power hungry sections of communications networks.

There is a reason why Jefferies did not mention Compass-EOS in its report; the company stayed shrouded in secrecy for six years, did not speak to the media, and did not announce its technological achievements.

Two days after the company's unveiling, in an exclusive interview with "Globes", its executives shed some light on its technological achievements, where it plans to go, and how it raised $120 million without a product and without scaring investors.

Compass-EOS has raised $120 million since it was founded in 2006 from Deutsche Telekom's T-Venture Holding GmbH, Comcast Ventures, North Bridge Venture Partners, Marker LLC, Cisco, Pitango Venture Capital, and Benchmark Capital.

"We made no effort at concealment. We simply didn't talk with people outside the company. We kept things to ourselves," Compass-EOS co-founder and president Michael Laor. "We simply preferred to wait until we could demonstrate that it works, otherwise people would be skeptical." We're challenging the big boys Maybe it's their age, or maybe it's the difficult and grey topic, but a glance at Compass-EOS's management -- co-founders Laor and chief scientist Dr. Michael Mesh, and CEO Gadi Bahat -- does not give the feeling of a start-up convinced that it will conquer the world. For better or worse, there is no Israeli Mark Zuckerberg walking the corridors of the Netanya-based company.

In technical jargon, the routers which the company has launched are located in network cores or local area networks, a market worth $14 billion in 2012 that has been led for years by Cisco with a 35 percent market share, according to Infonetics.

"We threaten the big router vendors, not because we'll replace everyone tomorrow, but because we're marking this as the next generation, which they cannot do," says Bahat. "No one in the market has been able to do what we're doing, otherwise as a start-up in this business, who would even spit at us " In 1997, Laor founded Cisco's Israel development center, which developed broadband data communications router mechanisms that were not standard for the time. The technological breakthrough that he led is now an integral part of the modern network, and he is now trying to make the next breakthrough in the field.

Laor says, "We're at a point similar to the one at that time in the communications industry. The current network structure has existed for 10-15 years already and has reached the end of its capacity to meet needs, so something has to change. I think that, within five years, the communication structure will look completely different. We're providing the building blocks for next-generation communications." Besides Laor and other Compass-EOS executives' previous connection with Cisco, its investment in the company is routine for giant computing vendors in interesting start-ups. But Compaass-EOS's success directly threatens Cisco, and they are ultimately rivals.

"Their intentions were mainly to keep their finger on the pulse, because the technology is interesting and they cannot create it," says Bahat about the Cisco connection. "On the other hand, they are also competitors, and there are walls we do not let them pass." Although Compass-EOS wants to become a big independent Israeli company, it would not be a surprise if Cisco has other plans, at least for the company's router business. Presumably, Cisco, despite its large investment, would not have an edge if an acquisition is on the agenda, but its interest cannot be ruled out.

"It's not possible to build a company on the basis of a possible acquisition," says Bahat, "but I see no problem in providing a giant company with a distribution license for the technology." Compass-EOS is thrifty Bahat takes every opportunity to mention that Compass-EOS is actually built of two companies: one which develops chip-to-chip optical communications technology with 18 patents; and the second that applies the technology for building communications equipment. This approach may pay off in terms of market access but it involves a major risk for investors.

"Globes": How did investors react to the potential when they listened to your vision for optical communications equipment Laor: "At first they looked askance and 'what is this thing', but they saw the potential. Financially, the company is very thrifty. We needed $65-70 million to reach a working prototype. We're basically a combination of a chips and systems company, which usually needs $50-100 million to develop a product, and we brought a product with a new technology. So we were correctly seen as very efficient." Will you need more money Laor: "Probably. Although we've started sales, we'll need more investment to build the company. I hope that it won't be a lot." Bahat: "If we decided to expand quickly to exploit our advantage, we'll hold another large financing round. If we decide to proceed more cautiously, it will be a smaller round." Is there a chance that you'll become a big company, an industry leader Laor: "I believe so. We've succeeded in creating breakthrough technology. There's been no innovation in this field for years, so we're getting support from customers. Somehow, all the stars lined up, and there's a real window of opportunity to become a real company. Quite simply, we want to go for an IPO." Mesh: "Israel ought to have a company on the scale of Philips or Nokia." Laor: "There is room for a communications equipment company in Israel. I believe that the role of start-ups isn't to take small steps, but aggressive leaps to try and change the rules of the game. It's risky and big, but that's what you have to do." Do you imagine that you might fail Bahat: "The thing that worries me the least is what will happen if we don't succeed. There are many ways to succeed here." Mesh: "You have to be brave." ___ (c)2013 the Globes (Tel Aviv, Israel) Visit the Globes (Tel Aviv, Israel) at www.globes.co.il/serveen/globes/nodeview.asp fid=942 Distributed by MCT Information Services

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