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How to Think Big and Move Fast

It’s hard enough in this economic climate to start one new company. So why is H. Michael Zadikian, who sold his last startup for $500 million, determined to start four at the same time? Part two of our entrepreneurial adventure story.

No one would ever accuse H. Michael Zadikian of thinking small. His new venture is called the Iris Group, and it consists of four optical-networking companies carefully constructed to tackle adjoining business challenges. Step-by-step, Zadikian wants to help telecom carriers manage high-speed data and voice traffic across every aspect of their optical networks. That is a huge problem, attracting attention from hundreds of young companies as well as industry giants like Nortel Networks and Cisco Systems Inc. Iris is still in its infancy and is less than a year away from delivering its first product to customers. But Zadikian and some powerful venture-capital backers think that Iris’s unusual four-in-one approach could pay off in a big way as the industry evolves.

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Here are more of the lessons he’s learned.

To Create Real Value, Solve Big Problems

Zadikian didn’t want Iris to be just another niche equipment company — sought after for its patents and engineering team, but unlikely to stay independent for long. To stand apart, Iris had to solve the monster problem of expanding bandwidth effectively and inexpensively. One of Zadikian’s winning concepts was this: Iris companies would create a huge bandwidth pipe that would best meet carriers’ needs.

Zadikian compares the standard method of adding channels (that is, colors of light) in the optical spectrum to building a log cabin out of toothpicks: It’s inefficient and unreliable after a certain threshold. He recruited a crack team of optics experts to create what Iris proposes is its clever alternative and competitive advantage: providing fatter pipes in proportion to a company’s network growth.

For carriers, this could be a godsend. Essentially, fatter pipes multiply bandwidth while reducing the number of necessary switches — and, therefore, reducing overall cost. In short, carriers using the Iris solution will be able to pay for service as usage grows rather than forecast data-capacity needs far in advance — which they typically underestimate.

To bring the concept of proportional expansion to market, Iris spawned four separate operating companies. Each company is situated in the part of the United States that potentially could attract the most appropriate talent and customers for its area of expertise. For long-haul services, Iris launched Latus Lightworks in Richardson, Texas, near Nortel’s and Lucent’s optical shops. For metro access, it rolled out Metera Networks in Richardson, where it competes with the myriad optical startups serving the same market, and in Ottawa, near Nortel’s home base. For necessary switching equipment, Iris created Coree Networks in Tinton Falls, New Jersey — Lucent’s backyard. Finally, Iris launched its research entity, Iris Labs, in Plano, Texas.

All four companies work together, but they concentrate on unique objectives. Coree, for instance, promises to fill a pipe with packets of information many times faster than industry pacesetter Juniper Networks does. Latus aims to maintain the quality and capacity of the long-distance network by reducing the “white noise” that gathers over long distances.

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Create a Significant Barrier to Entry

Launching all four companies in tandem is a lot harder than simply introducing Monterey Networks, Zadikian’s previous startup. But Zadikian believes that the quadruple threat will impress investors who are worried about competitors swooping in and snatching the industry. “Competitively, replicating one company poses few barriers,” Zadikian says. “The barriers are high to replicate all the pieces.” In other words, because Iris companies target different niches of the growing optical market, different competitors are unlikely to outdo Iris in all those areas.

Iris companies are also armed with exceptional, wide-ranging talent, a concentration of resources rarely found in big or small competitors. Currently, 19% of Iris company engineers and officers are from Fujitsu, 11% from Alcatel, 10% from Lucent, and the rest from Nortel and startups. The individual entities are so compelling, in fact, that CEO and other executive-level candidates occasionally spark bidding wars between two or more Iris companies.

Build for the Customer, Not the Technology

More than ever before, Zadikian is focused on determining the desires of potential customers. He’s learned the importance of synergy the hard way. At SourceCom, Zadikian’s initial proposal to Sprint was so out of sync with the carrier’s needs that he was ushered out of a meeting after 10 minutes. But the Sprint managers at that meeting — Bill Szeto and Rob Butler — saw a determination in Zadikian that they admired anyway. Now Szeto is Iris Labs’s cofounder and vice president of network technology and architecture. Butler became Iris’s first employee, before the company had funding, an office, or even incorporation papers.

Zadikian looked at Monterey Networks as a “technological breakthrough,” Szeto observes. “Zadikian’s attitude was, ‘I’m going to build it, customers will like it.’ This time, Zadikian got the users’ side of the story first. He asked, ‘What are carriers’ requirements, and how can we design everything from their perspective?’ “

The Iris companies are just starting to prospect for potential customers. They hope to do pilot tests of products by the end of 2001. The companies that they’ve stolen talent from could very well become their first customers. Sprint and WorldCom are hungry for clean solutions to the long-distance transmission problem. Scalability is especially important to such large customers.

Carriers often miscalculate increases in data and video traffic. As a result, they often get caught with inadequate or overpriced services. Even big outfits that sell solutions to carriers, such as Genuity Inc. and Nextira LLC, are looking for technology that’s flexible and manageable. Iris’s focus on seamlessly fitting with other products and services could be a huge selling point, if the companies are able to surpass the competition’s comparable promises. And given that the competition in the local market is quickly diminishing (consider the NorthPoint Communications bankruptcy filing), Iris’s job just may get easier.

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Structure for Value

Usually, small companies move quickly by iterating their products. But in this field, Zadikian says, “There’s no room for Silicon Valley behavior. You can’t ship a product that doesn’t work. Here, your first version has to work.”

That means relentless testing. Latus, for instance, created a lab filled with spools of multicolored string. That string is actually thousands of miles of fiber that allow scientists to test how many waves the fiber can handle. To do the testing, Latus commissioned enough power to light up a small city.

The switching-equipment, long-haul-services, and metro-access companies don’t move at the same pace. Metera, the metro-access company, was the first to get financial backing, partly because its market was already crowded. Latus started later, and Coree was the last to start. Coree’s startup operation ran the smoothest, attracting its talent brigade in about three months — a testament to the lessons Zadikian and the investors had learned.

And in an effort to jump-start a market, Iris started a separate semiconductor company to sell its products to competitors. The company, called Celerence Technologies, is licensing the fat-pipe concept, putting it in a chip, and selling the chip in the open market. “It may sound counterintuitive,” Zadikian says. “But it’s better to create a market than have a closed, proprietary solution.”

Create Solutions, Not Empires

If Iris has learned just one lesson this year, it’s that the market is wholly unpredictable. Last year, Zadikian could anchor the company against its competition. But the economic downturn has forced a retrenchment of big competition — which has created a more dynamic, and sometimes confusing, marketplace for customers. Amid falling stock prices and economic upheaval, a new force could emerge and dominate the market.

As a result, Zadikian says that Iris needs to focus on a crucial trifecta: sustaining the business, innovating new products and services, and looking to lead the market when it picks up again. “The market is going to be up for grabs,” Zadikian says. “As long as we sustain ourselves, we stand to be in a good position a year from now.”

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Of course, carriers will likely buy only one piece of the Iris system at once. Iris doesn’t intend to dominate the market; instead, it strives to spark changes in the way networks are built. Zadikian wants the Iris companies to stay ahead of the competition with cutting-edge technology and customer services. He’d also like to see the Iris Group spawn similar company-building models in other industries. But Zadikian isn’t obsessed about leading an empire. “We’re not here to build dynasties,” he says. “This model is about solving a problem in a different way.”

Read Part One: In Search of the Perfect Startup