Sigma Networks goes dark

Red Herring: We are not surprised that Sigma Networks in San Jose, California, is being liquidated. When the communications company launched in February 2001, Red Herring said its business model was highly suspect and limited in scope–it provided connectivity between telecom hotels (where phone companies lease space to put their equipment) in U.S. metropolitan areas.

Sigma’s strategy was to lease dark fiber from firms like Metromedia Fiber Network, instead of building its own network. In one sense the plan was smart, given that there was already enough fiber in the ground to meet demand. But the model had no barriers to entry–anybody else could lease fiber and mimic Sigma’s operation. Moreover, when the company launched, the market already was fraught with competition: Baby Bells, competitive local exchange carriers, and pure-play data providers like Telseon and Yipes Communications were jostling for the same customers. Sigma’s expected business failed to materialize.

It raised a stunning $155 million in equity investment from the likes of Frontenac, Benchmark Capital, Epoch Partners, Oak Investment Partners, and Salomon Smith Barney. It also raised $290 million in debt, primarily in vendor financing from Cisco Systems, Comdisco, and EMC.

One crucial reason Sigma was able to raise all that money is because its chairman was Reed Hundt, the former chairman of the U.S. Federal Communications Commission. But neither star power nor almost half-a-billion dollars in financing could help Sigma make its way to profitability. In January 2002, the company ceased operations.

Originally published in Red Herring issue dated March 13, 2002