Optical network equipper meets latest funding target. (Up Front).

Telecom giants are bleeding and optical networking equipment suppliers are struggling to stay afloat amidst a severe sales downturn.

Not an inviting environment for any fiber optic company, let alone those who invest in the sector. Yet, Sabeus Photonics, which develops and manufactures fiber optic devices, has just raised an additional $5 million in a funding round that now totals $21 million.

Even more surprising, Chatsworth-based Sabeus raised its latest round of funding at a higher valuation than the company received in 2000, before the telecom industry took its nosedive.

If Sabeus' success seems to fly in the face of funding trends, it is because the company itself has not followed the mainstream wave of optical networking businesses.

Sabeus, a four-year-old company, has, since its inception, gone after business overseas, where telecommunications companies were managing their growth at a far slower pace than were their American counterparts. As a result, the company's customers have continued to place orders while American customers have all but shut down their buying.

Perhaps more important, the company has diversified into other applications, including sensor devices for the defense industry, which are showing even more potential in the wake of the Sept. 11 terrorist attacks.

"The strength of Sabeus is that we have, right now, sales and customers," said Dimitry Starodubov, chief technology officer, "and at the same time we have a long-term perspective. We have very interesting and promising technology building right now."

Sabeus, which began seeking its third round of funding in September 2001, has secured investments from Agere Systems Inc., TL Ventures, Redpoint Ventures, Digital Coast Ventures and Credit Suisse Group. Most recently, Lexington Ventures invested $5 million in the company.

"The difference here is you have a technology that a lot of people are involved in, but you have a unique application of that technology and the ability to transcend that technology beyond telecommunications," said Harvey Gettleson, COO of Lexington Ventures, the venture capital arm of Lexington Commercial Holdings.

Sabeus is working on applications that will put fiber optic technology into computers, a development that could expand the market for its devices immeasurably.

"It's that application that I think provides a tremendous upside," said Gettleson. "I can't predict (the size of the market), but that's the great potential of the company."

Founded by a group of telecom industry veterans and scientists, Sabeus developed a business model based on automating the manufacture of optical fiber. Other companies were essentially manufacturing by hand, so when business increased, the only way to meet demand was to add workers and, therefore, the cost of doing business. Most companies were unable to bring those costs in line with new revenue levels when sales plummeted, and losses mounted.

"We thought that is not the right way to continue," said Starodubov. "We have to redesign optical components from the ground up and bring in a new class of components which could be manufactured in an automated environment on a large scale."

The company, which owns six patents on its technology and is in the process of securing nine more, developed a mass production technique that allowed it, not only to produce optical fiber more inexpensively, but for a variety of uses besides telecommunications.

"In 2000, when other people were raising $100 million with a better idea, we had worked out the details of our process and we were delivering a solution to the customers," said Starodubov. "We were delivering real numbers and real devices, and this is probably why our valuation wasn't hurt that much."

Sabeus' manufacturing technique creates fiber that is much stronger and, for instance, can be embedded in an aircraft wing to monitor a flight.

"Imagine if we had such a fiber system in every airplane," Starodubov said. "We would be able to detect problems way before it results in catastrophic damage."

Indeed, interest in the application of optical fiber for sensors and other monitoring devices has picked up considerably since Sept. 11, Starodubov said. Although telecom customers still account for the bulk of the company's sales, Sabeus is currently working with a number of major aircraft manufacturing companies.

"We had customers before that, but definitely we saw an increase of interest in our products in the area of security," said Starodubov.

The company's business model helped Sabeus to attract investors in an environment that has been downright hostile to optical networking companies. Overcapacity and the accompanying virtual shutdown in demand for optical networking equipment in the U.S. has many expecting a rash of bankruptcies in the sector. Just last week, Williams Communications Group Inc. filed for bankruptcy protection, and some of the largest telecom carriers just reported losses for the first quarter of 2002. With no pickup in demand expected for the next 12 months, many optical equipment manufacturers are projecting price declines anywhere from 30 percent to 50 percent this year.

Sabeus will not divulge its sales figures. But Starodubov said a majority of its revenues come from worldwide sales; primarily in the United Kingdom and Italy, and the company expects to be profitable by the end of this year.

At the same time, Sabeus has begun work on future generations of fiber optics which would replace electrical wiring inside computers, greatly expanding their ability to receive, send and process data.

"At some point the amount of information which would be transmitted inside the computer would be so huge and speeds will be so fast it will be necessary to switch from wires to optics," said Starodubov.

Optical fiber emerged as a technology for telecommunications because it can manage the flow of very large amounts of information very quickly. Right now, computers are able to download large quantities of data by hooking up with fiber optic networks, but Sabeus sees a future generation of computers that will not require that connection.

You will just plug in an optical cable and (the computer) will be connected, which will bring a lot of bandwidth, and be part of the (computer) design.

"That is my dream," said Starodubov. "To bring optical signal transmission inside of the computer."