The Telecom Corridor Booms

Tech firms and venture cash are flocking to the northern suburbs of Dallas

As Santera Systems CEO David Heard talked about Class 5 switches, Asynchronous Transfer Mode data and the need for a machine capable of switching multiple data formats, a decidedly un-high-tech machine worked methodically a few hundred yards behind him. A yellow Caterpillar D6M bulldozer slowly scraped the outline of a new street in the muddy black earth on the eastern outskirts of Plano, Texas, a sprawling suburb north of Dallas.

Both Heard and the bulldozer were working on Internet time, Texas-style. Santera had moved into its brand-new building just six months earlier. The bulldozer and a small army of construction workers on the east side of Plano were working on entire blocks of new, low-slung office buildings, making space for more companies like Santera: tech start-ups with short timelines, lots of money and a burning desire to locate in one of the hottest technology regions in America.

Hot technology region? Dallas? Plano?

As they say in Texas, sure enough, darlin. In March, VentureWire confirmed what tech people in Austin, Texas, and Dallas have known for months: There is no hotter venture capital market in the country than the Dallas areas Telecom Corridor. VentureWire found Dallas was the eighth most active area in the country for venture capital investment. For the 12 month period ended in February, $3.1 billion in venture money was invested in the Dallas area, a fivefold increase over the $604 million recorded a year earlier. No other region listed in the VentureWire Index recorded such a dramatic surge of venture money.

Why Dallas? Most responses to that question boiled down to three factors: talent, experience and money. "This area has an unbelievable wealth of experience," says Heard, whose company makes what it calls a superclass switch that can handle both circuit- and packet-based voice and data on a single platform. "Our entry-level people have 15 years of experience. Theres no other place on the planet that we could locate and get that kind of experienced work force."

That talent comes from a plethora of telecommunications companies that have located in the region over the past four decades. And there is plenty of money to nurture that talent. Austin and Dallas have numerous venture capital firms eagerly pumping money into the region. And those venture investors are shying away from many of the dot-com and software plays, focusing instead on companies that can provide innovative equipment for the build-out of the worlds telecom infrastructure. "Dallas is an incredible opportunity," says Rob Repass, a partner at the Austin office of TL Ventures, a Wayne, Pa.-based venture firm that has not invested any money in the Telecom Corridor, but is evaluating several proposals.

Short History

Perhaps its not surprising that Dallas has such a deep work force. Its high-technology pedigree is as distinguished — and arguably just as long — as any other region in the country. Indeed, the high-tech revolution started in north Dallas on Sept. 12, 1958, when Jack Kilby, a newly hired engineer at Texas Instruments, proved that his invention, the integrated circuit, could work. Over the next few years, Kilby and other engineers at TI worked feverishly on the integrated circuit, adding more and more transistors to a single piece of silicon. That invention led to a revolution in computing and telecommunications that continues today.

Although TI was a pioneer high-tech company in Texas, it wasnt alone. In 1957, Collins Radio, a well-established electronics company from Cedar Rapids, Iowa, built its first building on a 400-acre site just north of Dallas in the suburb of Richardson — a site that now marks the beginning of the Telecom Corridor. Collins Radio was later acquired by Rockwell, but it continued to attract engineering talent and more companies. In the 1980s, following the deregulation of the telecommunications business, MCI, whose microwave network relied upon Collins Radios products and technical knowledge, moved into the region. It was followed by Alcatel, Ericsson, Fujitsu and Nortel Networks.

Today, seven of the 10 largest manufacturers of communication equipment have major operations in the Telecom Corridor north of Dallas, according to the Technology Business Council, a local trade group. Although the strip-mall sameness of the Telecom Corridor cant rival the scenic hills of Silicon Valley, the concentration of companies is remarkable. Richardson alone has some 700 technology companies. Add in another 100 or so in Plano and Allen, and the numbers start adding up: The region now has more than 800 technology companies working on everything from software and switches to photonics and wireless broadband. The region is also home to systems integration and consulting giant Electronic Data Systems, which is based in Plano. Retailer J.C. Penney, which is having great success with its Web sales operations, also has its headquarters in Plano.

More expansions are in the works. Cisco Systems has begun construction on a new regional headquarters on the Plano-Richardson city line that will house more than 5,000 workers when it is completed in 2004. Nortel just completed construction on a new seven-story office building in Richardson.

Venture capitalists see the region as a prime place to put their money to work. Austin Ventures, one of the largest venture capital firms in the Southwest, recently closed a $1.5 billion fund, much of which will be invested in Dallas. Although the firm made its name in Austin, it sees Dallas as the future. "Weve found theres so much more going on," says Ed Olkkola, a general partner at the firm, which has invested some $310 million in two dozen companies in the region, including Santera. Austin Ventures also backs Chorum Technologies, an optical component company that makes slicers, filters and other products. Chorum filed an S-1 with the Securities and Exchange Commission last November, but the dive in the equity markets led the company to rethink its IPO plans and it is now hoping to go public in the next year or so.

Austin Ventures other notable investments in the region include Navini Networks, a provider of broadband wireless equipment, and VocalData, which makes voice-over-Internet Protocol softswitches.

Olkkola points out that Chorum, Navini and many other start-ups in the Telecom Corridor are being launched by mid- and high-level telecom executives who had good jobs at larger firms, but are now eager to start their own companies. "Many of these people are stepping out after spending 20 to 25 years in the large telecommunications firms. They have a big base of wealth and experience, and they know how to get a company up and running very quickly," he said.

The surge in new companies and the capital to get them operating is leading to some impressive new technologies. One of this years most intriguing developments in the Dense Wavelength Division Multiplexing business came out of Xtera Communications, a start-up in Allen, a town on the northernmost end of the Telecom Corridor. In January, the company closed its second round of funding, taking in $110 million in new capital. In February, Xtera announced it had successfully sent data at 10 gigabits per second over the S-band, a part of the color spectrum previously thought impractical to use. The technology, which Xtera says will deliver up to 96 additional 10-Gbps channels at 50-gigahertz spacing, could allow fiber network operators to increase the throughput of their networks without have to light additional strands of fiber — and that could mean significant cost savings.

Xtera is a prime example of a company that could have located anywhere, but ended up in the Telecom Corridor. Founded in Ann Arbor, Mich., in 1998, the company moved to Silicon Valley in 1999, then to Allen in 2000. John Bayless, the companys CEO and chairman, says it wont be moving again. "Xtera is here because of the cost of housing in Silicon Valley, and because the type of talent we needed to attract is here," Bayless says. "It was a decision motivated by housing costs, easier mobility and an easier style of living that weve seen occurring over the last two or three years."

Bayless and other executives say the recent slowdown in technology hasnt hurt their companies. Quite the opposite, in fact. They say the layoffs by some of the areas biggest employers, such as Nortel and TI, have allowed them to hire better people for their management teams. And because the Dallas areas cost of living is still relatively low, they dont have to pay the kind of salaries that they would have to pay in Silicon Valley.

Those facts may be causing a change of attitude toward the Telecom Corridor. Although it will likely never rival Silicon Valley in terms of the size or breadth of its technology base, the region is starting to get some respect. Its a change that Santeras Heard is noticing among his friends in California. "There were times Id be in the Valley and people would say to me What are you doing in Texas? " Heard recalls. "Now, they are calling, asking to see if I can help them set up some space here."