Shining a light on Lightfleet
With money from investors drying up, Camas company owes thousands in unpaid wages
Sunday, December 5, 2010
Just three months after receiving recognition from the Wall Street Journal for its innovative computing technology, Camas-based Lightfleet Corp. is in severe financial trouble.
Lightfleet has received three citations from the Washington Department of Labor and Industries for not paying its employees dating back to October 2008 , according to state records. The company is also having a harder time finding investors to kick in the $25 million it needs to pay off debts and ramp up production, according to Chief Executive Officer John Peers.
Lightfleet now owes more than $250,000 in unpaid wages and interest to seven former employees who filed complaints with the state, as well as an undisclosed amount to more than 50 current and former employees who didn’t request the state’s help in recovering their paychecks.
The company also faces backlash from shareholders and private investors who have yet to see a return on the millions of dollars they’ve sunk into the company since it was founded 14 years ago as Xyron Semiconductor.
Though startups often face financial challenges, state officials and an expert in growing tech companies said Lightfleet’s struggles are outside the norm.
Labor and Industries has seen an increase in wage complaints since January 2008 against companies that have gone out of business or are close to it, said Elaine Fischer, a spokeswoman for the department, but only about 2,200 Washington companies out of 162,500 registered employers received citations for nonpayment of wages during that time.
“Even when times are difficult, most employers do the best they can to pay employees,” Fischer said.
Being cash poor is common for startup companies with unproven technology, said Gerry Langeler, a managing director with OVP Venture Partners in Portland, but operating for several years without paying employees is unusual. At that point, the employees are more accurately characterized as volunteers, he said.
Peers said the company plans to repay its employees and its investors as soon as it finds success. In the meantime, employees’ complaints to the state make it harder for the company to raise money because it must disclose the citations to potential investors, he said.
“We’re a little disappointed people would add to the difficulty” by filing complaints, Peers said. “Some people become less thoughtful (after they leave the company).”
Angel investors — wealthy individuals — have kept Lightfleet afloat for years as it built prototypes and amassed a team of 55 employees.
But after signing just two customers in two years, the company’s primary asset is its patented optical system, which sends information between computer servers via light beams instead of electrical signals. The boxes occupy less space than standard servers in a data center, lowering heating and cooling costs, according to the company. Using light also speeds the time for processing massive amounts of data because multiple computers can talk to each other simultaneously instead of in a linear progression.
At its peak in 2008, the company claims its promising technology had attracted investment bankers at Merrill Lynch and the New York Stock Exchange, who were interested in speeding trade transactions on Wall Street.
Lightfleet was on the verge of receiving a large investment from Merrill Lynch in July 2008, Peers said, but the financial sector meltdown in September, and the bank’s collapse and eventual sale to Bank of America, prevented the transaction from going through. With the bank’s restructuring, all of Lightfleet’s contacts were laid off, he said. Bank of America wasn’t interested in pursuing deals brokered under the former Merrill Lynch, Peers said.
The NYSE also backed out due to uncertainty surrounding the presidential election in November and the threat of Wall Street reforms, Peers said.
The New York Stock Exchange and Bank of America declined to comment.
By February 2009, the company had run out of money from its angel investors and executives told employees it could be a while before they’d get paid again.
Working without pay
Hardware test engineer James Chapin worked at Lightfleet when executives announced to employees that they could either leave and take unemployment compensation or continue working without pay.
Chapin had worked at Lightfleet for almost two years, but quit in January 2009, after working three months without a paycheck. Lightfleet now owes Chapin more than $17,000 in back pay, according to state records. That’s about equal to a year’s worth of Chapin’s unemployment income, he said.
Promises from CEO Peers that the company would soon receive a major investment kept Chapin with the company after the paychecks stopped, he said. The same thing had happened the year before, but he eventually received nine paychecks in 11 days after a new infusion from angel investors. That was enough for him to hold out hope for a while longer when it happened again.
“I feel like I’m cast to the side, even though I’ve weathered all the hardships with the company,” Chapin said. “It’s disappointing.”
Chapin now says he doesn’t expect to ever be repaid for his work at Lightfleet.
“I think their time has come and gone; they wasted too much money,” Chapin said. “I really got the feeling they looked at each round of funding as a lottery ticket.”
In March 2009, Microsoft Research placed an order for Lightfleet’s prototype Direct Broadcast Optical Interconnect machine to test the technology. Lightfleet delivered that box in December 2009 at a net loss of about $240,000 to the company, according to internal e-mails obtained by The Columbian from former employees.
Microsoft declined to comment.
Without more orders for its prototype machines, Lightfleet sustains its 22 employees through a contract with the U.S. government acquired in June 2008, which helps pay the salaries of those employees who are specifically working on that contract, Peers said. Most employees, including company executives, work without pay. He declined to provide more details about the contract or the nature of the work, saying it’s strictly confidential and a matter of national security. He gave the same reason to shareholders in 2006 when he would not divulge more details of the company’s financial situation, according to the e-mails.
Almost a year after receiving its first prototype, Microsoft hasn’t yet placed an order for more machines, though Peers said the order is imminent. Its potential ability to attract large customers such as Microsoft has been a keystone of the company’s fundraising campaign.
Chief Financial Officer Bob Collier said Lightfleet is now in active discussions with five potential angel investors from the Vancouver-Portland metro area and three other states.
Langeler’s firm, OVP, considered investing in Lightfleet about six months or a year ago but decided not to go further due to the company’s “investor baggage” and uncertainty about the feasibility of the technology, he said.
“The technology appeared to be very interesting and some really bright people work there, but we couldn’t get past a couple of hurdles,” Langeler said. “We said, ‘There’s too much going on here that makes us uneasy.’”
Lightfleet is seeking about $25 million to pay off its debts and build 10 more prototype units. That’s the same amount of money the company told investors it needed in a 2006 e-mail soliciting more funds.
Collier says they’ll also need another $20 million to ramp up sales and production.
With both investments, he expects the company to be profitable by 2014, when he forecasts total shipments of 2,500 units.
The company won’t necessarily use a new round of funding to pay former employees and vendors, however. Lightfleet said it needs to invest first in the people and products that will make its business successful.
When asked about the criticism of investors worried about recouping their money, Peers said they didn’t know what they were talking about.
“Why would the patent office approve our patents? Why would Microsoft buy one of our machines if this was a con?” said Peers. “We’re too old for cons.”