Investors Pump $13 Million Into Packet Engines Strong Capital Position Will Help Company Gain Edge On Competitors For “Gigabit Ethernet” Market

In a second round of funding, investors have put $13 million into Packet Engines Inc., a Spokane high-tech start-up company.

Lead investor in the financing package is GeoCapital Corp. of New York. Mayfield Fund of Menlo Park, Calif., and Battery Ventures of Boston - which together invested $7.5 million in Packet Engines last August - also took positions in this second round of financing.

But Packet Engines officials are particularly pleased that about $3 million of the new money comes from Washington state investors and investment groups. Spokane Capital Management Corp. and its affiliates put up about $1 million of the new money.

Embroiled in a product development race in one of the most competitive of high-technology fields, the latest investments make Packet Engines among the best capitalized of the contestants in the battle for the emerging gigabit ethernet market.

“This gives us a significant war chest to go forward and do what we need to do, based on need and opportunity, rather than being restricted by a thin budget,” said Bernard Daines, Packet Engines founder and chief executive officer.

Daines also noted that Packet Engines was able to pull together this infusion of money at a time when the venture capital market has become very unfriendly.

Last year, when Packet Engines received $7.5 million in venture capital funds, that market was “free-flowing,” he said, “but now that market has turned. A lot of companies are trying to get their second set of money, and can’t do it.

“The important message to the financial community is that here we are in Spokane, a small company out of the mainstream, successfully raising a significant amount of money in the midst of tough times.”

Packet Engines is in a race with a number of similar companies around the world to produce products that allow computer networks to exchange information at rates 10 times faster than is now possible.

Daines is a pioneer in the field of high speed computer network connections. He helped create the technology that allowed those networks to jump their speed from 10 to 100 megabits per second only a few years ago. The next step is 1,000 megabits - or one gigabit - per second. The standard platform on which these networks are based is called ethernet, thus the term “gigabit ethernet technology.”

“From our perspective, we are extremely bullish on the gigabit market in general,” said Matthew Smith, general partner with GeoCapital. “With the emergence of more graphics, files, the Internet, and so forth, we think it is going to play a critical role in upgrading today’s networks.”

GeoCapital, through its 21st Century Communications Partners group of funds and its Wheatley Partners Group of Funds, has been a big investor in high-technology companies, including Novelle, Cheyenne Software, Catalina Marketing and Cambridge Technology.

He said the company was attracted to Packet Engines by its performance thus far, and because of Daines.

“Bernard has a long track record in this industry,” Smith said. “With his success in Grand Junction, he is widely recognized as a pioneer in this field. We feel Bernard and his team have the ability to stay ahead of the curve, assuring that Packet Engines maintains a leading position in the market.”

Grand Junction is a name that warms the hearts of venture capitalists everywhere.

Daines was one of three partners who founded that company in 1992 with capitalization of $4 million. That company led the transition of network capabilities from 10 to 100 megabits per second. In 1995, the partners sold the company for $350 million.

“Certainly we would hope to be as successful as that this time,” Matthews laughed. “Let’s just say we are extremely enthusiastic about the company’s prospects, and what that will lead to eventually, who knows?”

Tom Simpson, managing director of Spokane Capital Management, has been a member of the Packet Engines board of directors for about a year. He said his company has been anxiously awaiting its opportunity to invest in Packet Engines.

“First of all, the market they are competing in is estimated at $2 billion by the year 2000,” Simpson said. “And secondly, although many companies are competing for that market, Packet Engines is clearly one of the leaders from a management standpoint.

“And now, it is the best capitalized company of all of them.”

Packet Engines officials plan to eventually take the company public.

“Packet Engines plans to do an initial public stock offering in the future, the timing of which will be determined by a number of factors,” said Pete Price, vice president of finance and chief financial officer for Packet Engines.

Daines speculated that such an offering might go forward in 1998.

“Right now,” he said, “the IPO market is dead. But if it improves, the second half of next year would be right on track for us.”

, DataTimes