Startups Look for the Bottom
"Startup Shakeout," a report from Light Reading's paid subscription research service, looks at the prospects for telecom startups, evaluating trends in the public sector as well as in private venture funding and M&A to see how things are shaping up.
The recent rally in the public markets, on which startups' fates depend, have picked up a bit, putting the breaks on a three-year decline in startup valuations. In the first half of 2003, for instance, the Light Reading Index of leading telecom equipment suppliers outperformed the Nasdaq Composite (see Market Pulse).
Mergers and acquisition activity also hints at possible upward change. Although data from Broadview International shows a meager $53.7 million in North American optical networking deals for the first half of 2003, compared with $1.23 billion for 2002 and $5.69 billion for 2001, there have been 12 networking transactions this year so far -- and there were only 16 deals in all of 2002.
Valuations in the private market have stabilized, too, and startups are finally finding it easier to raise money than they were in 2002.
But there are some pessimistic notes. VCs seem consumed with "rescuing" their current portfolios, rather than building new technology startups. While deals like April's $158 million purchase of WaveSmith Networks by Ciena Corp. (Nasdaq: CIEN) continue (see Is Ciena Eyeing Luminous & Laurel?), VCs aren't interested in early-stage optical networking -- at all. This doesn't mean a market won't return, but it will be 12 to 24 months before investment in early-stage optical deals picks up.
All in all, the environment has caused startups to adapt a survival mentality in which they hunker down with existing cash and figure out how to weather the storm.
Startups that have survived so far have found they need to be ready to do anything customers ask of them -- like moving more manufacturing offshore, as companies such as Dowslake Microsystems have done. Others, like Iolon Inc., have had to find new markets and create new products in order to stay in the game.
Realistically speaking, before any rebound gels, there’s going to be even more of a shakeout among second-tier industry incumbents and private companies, the report concludes. The larger startups are often several years old, their product space has altered unrecognizably, their R&D is diminished, and their cash is burning brightly. One private company CEO says: “They’re white stars ready to flame out, which will actually leave a gap in the market for the startups with newer technologies to survive and help innovate into the next market wave.”
The report charts the financing and valuation of 28 startups, including the ones just mentioned, and examines their progress.
— Mary Jander, Senior Editor, Light Reading
The current Light Reading Insider report – “Startup Shakeout” – is available here. A single-user license to the report is $400. An annual single-user subscription to the Insider, which includes access to the complete archives, the current report, and each of the monthly reports issued over the next 12 months, is available for $1,250 per year.