Startups seeking a carrier customer have the odds stacked against them, say keynoters

January 23, 2002

2 Min Read
Startup Squeeze Prevails at SuperNet

SANTA CLARA, Calif. – The venture-backed equipment maker looking for its first big carrier customer is going to find 2002 a troubling year, say presenters here at the sparsely attended SuperNet conference.

Service providers here are convinced that the demand for broadband services will catch up to the glut of fiber optic capacity in today's networks. What's difficult to pin down are the timing and the specific services that will bring unused capacity and new services more into balance.

In his keynote address Tuesday morning, Frederick R. Chang, president and CEO of SBC Technology Resources Inc., the research and development arm of SBC Communications Inc. (NYSE: SBC), singled out several services that will drive DSL usage – such as video on demand and collaborative corporate computing. The question hanging in the air after his speech: What will make carriers move more quickly to deploy the equipment needed to bring DSL to the masses?

Chang blamed regulatory constraints as one of SBC's obstacles, but WorldCom Inc. (Nasdaq: WCOM) vice chairman John Sidgmore hit on what really seems to be holding back DSL buildouts: "Voice is still the money maker and, while there's tremendous growth in data services, they aren't nearly as profitable."

For equipment vendors that need a carrier contract to survive, the slowed spending, decreased competition amongst carriers, and dearth of compelling and affordable applications means that funding will be harder and harder to come by.

Bart Schachter, a general partner at Blueprint Ventures shared a story about one equipment company that is now seeking a $50 million funding round because a potential carrier customer won't give the company a purchase order until it has that much cash in the bank.

The fact that the pace of innovation has slowed will definitely favor the established equipment vendors, says Jim Parmelee, an analyst at Credit Suisse First Boston. But even one of those companies may collapse thanks to brutal layoffs. "The level of disarray within these companies is remarkable," he says.

Worse for existing venture-backed equipment companies: The VCs say they're eyeing new investments – seed round or Series A – because those investments are now a better value and they won't have to reshape an existing company to conduct its business with less cash.

Repositioning a company from one that addressed CLECs to one that addresses incumbent carriers may be folly, too, in Chang's view. "[Equipment vendors] have to have the stability, scale, and network management capabilities to be contenders," he says.

"I'm still very optimistic about the Internet's growth," insists WorldCom's Sidgmore, also a partner at New Enterprise Associates (NEA). "But not every [equipment startup] idea is a good one. This is not magic."

— Phil Harvey, Senior Editor, Light Reading

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