Funding failure steamrolls VPN start-up plans - Company Financial Information

The failure of a significant new entrant business telecoms operator has thrown open the European market for virtual private networking (VPN) based on Internet Protocol (IP). But analysts are divided as to whether it will spell trouble for other emerging service providers.

Aduronet Ltd., of London, said last week that it had been unable to secure $120 million in secondround finance and has had to call in provisional liquidators.

"Aduronet has tipped the hat for those companies in the second rush," said Camille Mendler, director of the convergent communications practice at the Yankee Group Europe of London. "[The second wave of startups will thank Aduronet for priming the market."

"IP VPNs are the basis of corporate networks of the future," said Margaret Hopkins, principal analyst at Cambridge, England-based consultancy, Analysys Ltd. "They are not a bad business to be in."

But others are less sure.

"I think the same thing could happen to others," said Peter Judge, directing analyst, Europe at Infonetics Research Inc., of San Jose, California. "Investors have become more impatient." Judge believes established VPN suppliers will benefit more. "They don't have the problem of funding but do have other problems such as network upgrades to enable new services."

"More and more power is going to the incumbents," agrees Mikael Sandberg, investment analyst at Regency Capital International Ltd. in London. "Their strengths include their cleverness in how they manage their cash flows and how they use their strong customer relationships for mutual benefit."

But some IP VPN startups are confident they can succeed where Aduronet failed. Imperito Networks of Santa Clara, California, has raised $10.2 million in a first round of funding. Unlike Aduronet, it is not a network operator but a "managed service provider," said Bill Ferguson, Imperito's chief executive.

"This meets the security needs but requires considerably less capital expenditure compared to operators that build their networks."

Meanwhile, Exario Networks Inc., of Parsippany, New Jersey, which provides IP VPN managed services for corporate customers, has just secured $31.5 million of funding.

Savvis Communications Corp. of Herndon, Virginia, offers IP VPNs and is expanding its presence in Europe. "We agree with market forecasters that IP VPNs is going to be an enormous market segment," said David Frear, Savvis' chief financial officer. But he is quick to stress that "it is one of several service offerings."

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