Lucent Technologies bet on Jato Communications illustrates some of the pitfalls faced by big equipment vendors that lent start-ups money for virtually all of their business plans.
If it hadnt been for Lucent, Jato probably would never have gotten off the ground. The Denver communications company got a $50 million line of credit from Lucent in early 1999 to buy virtually all of its DSL network equipment, which included products manufactured by Lucent and Copper Mountain Networks. Lucent also signed up to build, maintain and manage Jatos network through 2006. This initial push soon earned Jato the trust of other large investors, including Global Crossing, Microsoft and Qwest Communications International.
But Jatos business stayed stuck in red ink, generating $44,000 in revenue on losses of more than $7 million in 1999. And Lucent lost big when Jato pulled its IPO after the market turned in April 2000.
Supportive as it was, Lucent became reluctant to back Jatos bet to become a bigger company. Jatos initial business plan, funded by the $50 million credit line, was to serve 14 markets with wholesale DSL services. When Jato decided to expand to 50 markets, it wasnt able to persuade Lucent to take on the additional risk, though other investors did pour in more money. But by the end of last year, Jato was out of cash and the company closed its doors, voluntarily surrendering its assets.
"For a lot of 2000, the company was in discussions with Lucent to increase its credit facility, but such an increase was contingent on an IPO or some significant equity financing," said Brian Gast, ex-CEO of Jato, who is now making money in the little leagues as an executive coach.
Gast doesnt blame Lucent for Jatos demise, admitting that the company failed to perform.
Much to Lucents chagrin, Jatos equipment, booked as sold, is now back on the market, along with the networking boxes of other failed carriers.
"When equipment is taken out of the box, and sometimes even when just the title has changed hands, equipment manufacturers are typically reluctant to take it back," Gast said. "You bought it. They booked it as revenues. They reported it to their shareholders as something they sold. This isnt Home Depot — bring it back for any reason, and get your money back."
Like it or not, Jato gave all of its equipment, including boxes from other manufacturers, back to Lucent as its biggest creditor. Lucents policy is to refurbish the equipment and resell it, said Dick Muldoon, a public relations manager at Lucent. But he refused to say what happened to Jatos boxes, citing confidentiality.
Upon receiving boxes back from Jato, Lucent would likely have to restate its financials, said David Passmore, an analyst at Burton Group. Reselling refurbished boxes would cushion the blow, but Lucent would still have to write off the difference between old and new gear. And worst of all, refurbished gear would interfere with new gear sales.
"It would come back to haunt them," Passmore said. "This glut of inventory would force them to lower prices on any unsold new gear."