Waiting for the Ice to Break
By David James, Wed Apr 03 00:00:00 GMT 2002

Most technology VCs, once known for throwing money at anything that did not yet exist, are in a deep freeze - waiting for the ice to break.

One of the world’s longest-running betting pools is the Nenana Ice Classic, the object of which is to predict the exact moment of the annual ice breakup of the Tanana River near the Alaskan village of Nenana - a moment determined when a specially-constructed tripod, lodged in the ice, moves 100 feet. Tens of thousands of people pay $2 a ticket to enter the contest each year. Last year’s jackpot was $308,000.

When it comes to the mobile Internet, most venture capitalists have been locked in the ice far longer than this year’s Nenana tripod. Wireless entrepreneurs are wondering when the ice will break and what will break it - what will start investment funds flowing again.

Stuck in the ice

Many factors contribute to the slowdown in venture capital funding in the broadband wireless sector. Economies around the world are in a slump. Telecom companies, once stock market darlings, are now stock market dregs. The dotcom bust sent shockwaves far beyond dotcom ventures. Mergers and acquisitions and IPO offerings are stagnant, so venture capitalists currently see few good exit strategies for their investments. Technology corporations like Microsoft and Intel that invest in wireless startups have had to write down the value of their investments, sapping their appetite for new outlays. In Europe, telecoms impoverished themselves by spending billions on third generation (3G) spectrum licenses, depleting their economic and competitive strengths for the build-out of broadband wireless services.

In addition, mobile Internet technologies have faltered. WAP was expected to be a huge success, enabling the mobile masses to access the Web and other pleasures on their mobile phones, but it turned out to be slow and awkward. Likewise, GPRS, a 2.5G technology for always-on connectivity, has been beset with technical difficulties and launching delays. Even NTT DoCoMo’s vaunted 3G service in Japan is proving slow to gain subscribers and is behind schedule in meeting national rollout targets. Meanwhile, device manufacturers have been slow to provide handsets for new broadband technologies. Only cdma2000 1xRTT, a 2.5G technology, seems to be rapidly gaining subscribers and meeting handset demand, at least in Korea.

Fogged in

“Venture capital investing in next generation wireless solutions has been very cautious,” says Robert Goeltz , director of wireless and emerging technologies at Garage Technology Ventures, a venture capital investment bank in Palo Alto, California. “It’s primarily the core solutions, such as platforms that enable carriers to deploy and bill for data services, that are attracting funding. VCs have shown little interest in deals for advanced services like streaming video. We believe that the infrastructure to support these advanced services will not be widely available for some time.”

Private VC firms that traditionally invest in later stage opportunities are not investing in broadband wireless deals now, adds Jai Das , a principal of Draper Advisors in San Francisco. And Fritz Jordan , a global wireless industry analyst in San Francisco, says that while some existing VC-backed companies are receiving follow-on investments, there has been a dramatic slowdown in initial and early-stage VC investments in new broadband wireless deals. “VCs are waiting for the fog to lift,” he says. According to VentureOne, a San Francisco-based venture capital research firm, the fog is very thick, with U.S. VCs concentrating on shoring up their existing portfolio companies and not looking for new opportunities. In 2001, they report, the total number of first-time fundings (initial rounds) in all sectors fell below 1996 levels for the first time.

Knowing who your friends are

The one bright spot in this picture, however, is that mobile device manufacturers have continued to provide strong venture capital support to wireless startups through their affiliated but independent VC organizations. Among these are Nokia Venture Partners, Siemens Venture Capital and Ericsson Venture Partners. Nokia Venture Partners, for example, now manages two funds with an aggregate value of $650 million.

Typically, such manufacturer-related VCs invest in the entire wireless space. They tend not to invest in next generation devices or core network components such as base stations and mobile switching centers (their parent companies are focused on this), but otherwise their interest in wireless opportunities is broad. “We are actively looking at next generation network technologies, key handset components such as power, display and chips, security and enterprise software, and IP technologies,” says Kwan Yoon , senior analyst and vice president Korea of Nokia Venture Partners in Menlo Park, California.

In addition, some private venture capital firms are actively looking for broadband wireless opportunities, if not yet actively investing new money in them. According to Jordan seasoned European private VCs, such as 3i and Argo Global Capital in London and BrainHeart and Startupfactory in Stockholm, are especially active in broadband wireless investments.

In the United States, some of the most active firms in the space are Ignition Partners (Belleview, Washington), Accel Partners (Palo Alto, California), ComVentures (Palo Alto), Apax Partners (New York), Redwood Venture Partners (Los Altos, California), Polaris (Boston), Bay Partners (Cupertino, California), Bessemer Venture Partners (Wellesley Hills, Massachusetts), Mayfield Fund (Menlo Park, California) and Austin Ventures (Austin, Texas).

Global distinction

Predictably, there are some regional differences in global VC investment interest. According to Jordan, VCs outside the U.S. tend to be more interested in broadband wireless opportunities because technology standards in their regions are less confused than in the U.S. In addition, they are not as wedded to the IPO market as an exit strategy. As to types of investments, Garage Technology’s Goeltz sees more content plays being funded in Europe and Asia, where games, SMS (short message service) and ring tones are more popular than in the U.S.

One would expect that there would be more VC activity in broadband wireless in Europe and Asia since markets for 2.5G and 3G services have grown more rapidly there, but surprisingly there is more such activity in the U.S. Yoon of Nokia Venture Partners says that his firm’s most active offices are those in the U.S. (in Menlo Park and Washington, D.C.), and that 80 percent of their investments are in the U.S. (Their other offices are in Helsinki, London, Tokyo and Hong Kong.)

Jordan, who considers a VC firm to be a major investor in broadband wireless if it has at least six investments in the space, is not aware of any that are currently active in Asia, although a number of Asian telecoms and corporations such as Softbank are known to have a significant number of such investments. In some Asian countries, as in Europe, the high cost of 3G licenses inhibits venture capital investments in broadband wireless. In Taiwan, a country of only 23 million people, local telecoms recently bid an aggregate of $1.4 billion for five 3G licenses. According to Paul Chang , president of Primus Capital, a venture capital firm in Taipei, the financial burden of the licenses raises serious questions about the future market for 3G technologies in Taiwan and the financial capability of operators to provide broadband wireless services.

First things first

“For many VCs, until the ice breaks for broadband wireless investments, the better investments are ‘profit now, migrate later’ investments,” says Emory Winship , managing director of KB Strategic Advisors, a venture advisory firm in San Francisco. One example is his firm’s investment in Kivera, Inc., a provider of wireless location-based solutions, such as personalized wireless travel services and roadside assistance for customers of the American Automobile Association.

Indeed, “profit now” is an important objective. According to Jack Fuchs, vice president business development and sales for SOMA Networks, a provider of broadband wireless solutions and services in San Francisco, VCs are most interested in deals that will provide near-term returns, such as network solutions that provide easy and inexpensive installation for users and cash-strapped carriers alike. One area of interest is the deployment of 802.11 broadband wireless services in “hot spots” on campuses, at airports and in public lounges. Kelly Porter , managing partner of ZAP Ventures, a VC firm in Los Altos Hills, California, that specializes in broadband investments, says that his firm is actively looking at the integration of 802.11 technologies in handsets and at telematics (data connections in automobiles).

Looking ahead

“When the VC ice breaks,” says Das of Draper Advisors, “the big opportunities will be in the convergence of 3G and 802.11, giving users uninterrupted broadband connectivity - with ‘all IP’ networks - as they move from place to place anywhere in the world.” David Williams, the recently retired director of venture banking for Merrill Lynch in Palo Alto, California, believes that the most exciting investment opportunities will be in automated content conversion - software that converts Web pages and full-motion video to fit the screens of existing and upcoming handheld devices. “This is attractive because (1) if it works, it can be leveraged across mass amounts of consumer and commercial content, and (2) without it, content will have to be recreated manually for these devices - a process that is slow and ultimately will never cover all the available full-screen content. Essentially, content conversion is the bottleneck. Firms and software that automate this process will open up the market. More content will drive more hardware sales.”

Yoon of Nokia Venture Partners sees the best long-term opportunities in network solutions. “This is especially important for the United States, where there is a lack of technology standards and a huge market,” he says.

Timing is everything

And when will the VC ice break? Jordan thinks it will be when the first big, successful IPO occurs. Winship believes that it will be when the telcos wake up and “seed the market” by subsidizing handset upgrades that enable users to access 2.5G and 3G data. For the mobile telecom sector in general, Yoon believes it will be when the earnings of telcos and device manufacturers improve and there is a pickup in IPOs and mergers and acquisitions activity.

Historically, the annual ice breakup of the Tanana River at Nenana, Alaska, occurs some time between April 20 and May 20, with an average date of May 5. If your gambling interest lies more with broadband wireless, it’s time to place your bets on the date of the VC ice breakup.

David James is president of Business Strategies International, a San Francisco-based consulting and venture-development firm specializing in technology business opportunities.