(T) Yes, a telecom start-up can still be bought for $290M like Entrisphere today by Ericsson! But it has been a while since the last time that happened.

I believe that one of the first networking start-ups to be bought for a high price was Centillion Networks (Token Ring switches) started by Bobby Johnson and presently CEO of Foundry Networks.

Centillion was acquired by Bay Networks in 1995 for $140M and made Silicon Valley VCs realize the potential returns of investing in networking initially for enterprise networks but latter for service provider networks. The demand for new equipment to support data services and IP traffic and for more bandwidth inflated valuations of telecom start-ups more than enterprise networking start-ups.

And, yes VCs played well with their telecom investments with the next valuation record made by Juniper Networks which reached a market cap of $10B in its IPO debut in 1999.

Every start-up that was created from 1995 to 1997 and had built a sales and channel organization was going public those days or got acquired for a nice price tag such as Cerent’s (metro SONET equipment) $6.9B acquisition by Cisco Systems.

But after Corvis’ (long-haul optical transport) $9B IPO in January 2001, the Internet (and Telecom!) bubble for insane valuations started to explode.

The low margins of IP services, declining pricing of long distance voice services, and huge network capital investments quickly eroded the profitability of the entire telecom industry just before the slow down of worldwide economies after 9/11. These economic factors, combined with an excess of industry players and a shortage of capital financing (too much money lost during the bubble by investors!), drove shakeout and consolidation.

Most telecom start-ups after the burst of the bubble run out of money and shut down. Very few were acquired (the very best ones!) and only for a small price compared to previous valuations. Successful cases included Vivace Networks (multiservice switches) acquired by Tellabs in 2003 for $135, TiMetra (MPLS routers) acquired by Alcatel in 2003 for $150M and Internet Photonics (CWDM/Ethernet) acquired by Ciena in 2004 for $100M.

Recently published market surveys have shown that service providers were ready again to investigate new products and technologies from telecom start-ups in particular for optical networks where very few investments (if any!) have been made for the last four years.

So let’s hope that this acquisition of Entrisphere is going to spark again the attention of new telecom entrepreneurs.

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