Bandwidth Startup’s Big Plans Hit By Credit Crunch

[qi:080] Darkstrand, a Chicago-based startup planning to commercialize the fiber network built as part of the National LambdaRail (NLR) project, is — like most of its telecom brethren — facing a rocky road. NLR is a federally funded network that connects about 30 universities across the country; Darkstrand won the rights to offer commercial services on it in May 2008. But the company, which needs to raise more capital to upgrade the NLR network in order to meet commercial needs, is being challenged by a moribund economy, which is turning sales cycles into the equivalent of the steep Alpine climbs that mark the Tour de France.

nullBack in October, Stacey spoke to the 3-year-old company’s CEO, Mike Stein, who told her that Darkstrand would need to shell out some $24 million in capital payments for the network, plus $2 million-$3 million a year to maintain it. Even more money would be needed, Stein said, to keep the company (and the network) growing. He affirmed as much during a conversation I had with him last week as well, adding that not only has the current economic environment made raising money a challenge, but it’s having an impact on the company’s valuation.

Darkstrand was attracting strong investor interest up until markets nosedived in the fall, said Stein, who estimates that it would need about $100 million to fully realize its dream of offering 80 Gbps service over the network. For now, however, Darkstrand is focusing on getting its commercial service launched on Jan. 31, 2009. It’s targeting large companies, such as movie production studios or geo-exploration giants, that would spend $100,000 a month or more on bandwidth. Customers like that would allow the company to raise new money when the time is right, Stein said. For now, he’s banking on its current investors to keep Darkstrand going.

Over the long term, his belief in the future of his business is well founded: The demand for bandwidth from different kinds of corporate applications is only going to increase. Despite the presence of a large number of competitors, the corporate market still needs a lightening rod. “We don’t want to be like another telco,” Stein said when I asked him how he’s going to stand out in a business that is prone to ever-declining prices and fraught with competitive risk. “We are looking to solve workflow problems for big corporations, and we see that network is a tool to solve those problems. It is what you can do with the network.”

With a roster of powerful advisers that include the former CEOs of Caterpillar and Monsanto, Stein has the right connections to land new accounts. That said, I’m not yet clear as to how Darkstrand will stand out from its rivals. As a company, it has a lot of challenges. For one, it’s basing its network on NLR, which is rumored to have reliability issues.

Many think the problems stem from the equipment used in NLR, most of which came from Cisco Systems, one of the network’s key backers. It’s said to be in need of major upgrades as its gear is a generation behind what’s used by commercial providers. I heard from some sources that when NLR and Internet2 were planning to merge, there was talk of ripping out the Cisco gear. Darkstrand executives said they were in close talks with Cisco to get newer gear and upgrade the networks, in addition to spending their own money on other types of equipment. If it gets them paying customers, it would be money well spent.

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