Growth Equity Investment Case Study | Promatory

Background

Promatory was a development stage company designing ATM access switches for telecommunications carriers. The switches supported multiple Digital Subscriber Line (“DSL”) technologies. The company’s hardware was installed at a telephone company’s central offices to significantly increase bandwidth to their customers over the existing copper wire infrastructure. The increasing demand for bandwidth from both residential and business customers was expected to drive demand for several different competing solutions, such as DSL technologies and cable modems. At the time, industry analysts estimated that there would be 2.5 to 4.0 million DSL lines in service in the U.S. alone by the year 2000 and growing rapidly over the next 5 years. Promatory had an impressive management team, led by CEO, Roger Dorf. Roger was a seasoned professional with 30 years of experience at companies such as AT&T Network Systems, AT&T Paradyne, and ROLM.

Generation’s Involvement

Since early 1997, Generation had been researching and developing its last-mile broadband investment initiative. We were convinced that the seemingly insatiable demand for internet bandwidth would force local telecommunications service providers to invest in the hardware and software infrastructure required to satisfy their customers. We had analyzed competing technologies such as cable modems, fixed wireless and DSL solutions, and selected DSL technologies as the preferred investment option. We then began an exhaustive research effort in the DSL space, meeting and evaluating all the major competitors. At the end of this process, we chose Promatory as our vehicle to capitalize on our investment initiative. In August 1998, Generation invested $3.3 million and followed up with another $3.0 million investment in October 1999.

Generation worked closely with the Promatory team, specifically in the areas of product pricing, sales, and strategy. Our competitive analysis of the industry was particularly valuable in the company’s work on its prioritization of product features, pricing policies and marketing strategies. Promatory successfully executed its marketing strategy of teaming with a large channel partner who had established relationships and credibility with major telecommunications customers but needed next generation technology to service them; Nortel Networks became that partner.

Outcome

In January 2000, Nortel Networks (NYSE: NT) purchased Promatory for $800 million. As a result of this transaction, Generation distributed NT shares to our Limited Partners, netting a return of over 11x our investment.