Is Qwest Communications International Inc. (NYSE: Q) giving startups the bum's rush out of its network?

That question hangs heavy over the venture capital (VC) community -- especially in California -- where the rumor mill is grinding away on talk that Qwest executives are on a mission to reduce their reliance on technology from startups. One tale has Qwest turning its back on telecom equipment startups completely, shunning any equipment purchase from fledgling vendors.

The truth, however, is a bit more complicated and a little less damning for startups. Sources in Silicon Valley say that one Qwest executive, James L. Becker, Qwest's EVP of worldwide and IP networks, has told venture capitalists that Qwest needs to limit the type of testing it can do for startup equipment companies. (Becker could not be reached for comment.)

In many ways, the story makes sense. Testing startup technology is time-consuming and expensive. As it goes through the process of cutting some 7,000 jobs this year, Qwest now has significantly smaller network engineering and lab engineering teams. This has put Qwest in the position of saying it can only accept equipment that is ready for general availability, say several Silicon Valley sources. What's more, the startups providing equipment now have to provide their own teams to run the tests under Qwest's supervision.

Of course, that it's harder to get most carriers to buy from startups these days is hardly earth-shattering news. "We've heard from one top-five carrier [not Qwest] that it requires its vendors to have at least $50 million in the bank," says Bart Schachter, cofounder of Blueprint Ventures. Carriers are still open-minded about evaluating products that make a difference, he says, but they won't buy until it's clear that the startup can support them.

This, in turn, has been an impetus to the run of larger equipment companies like Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) snapping up startups such as Ocular Networks, which had caught carriers' attention before it was acquired (see Tellabs Nabs Ocular).

None of this should be surprising. "Large carriers never used to buy from startups," says Doug Green, founder of The Bradam Group, a telecommunications consultancy. "In the old days, the large service providers would introduce startups to their key vendors if they were keenly interested in the [startup's] technology. That worked in most cases, because the larger [equipment] vendor got to act as a channel for product before buying the startup."

Whether it is due to a lack of resources or corporate politics, most are applauding Qwest's slower approach to testing startups. A couple of years ago, big carriers bought into some products well before they should have, according to Roland Van der Meer, a partner at ComVentures. "At the time," he says, "the mistake paid for itself in the options" the startups gave to carrier executives.

During boom times, Qwest and other aggressive carriers such as Williams Communications Group hedged their bets on cutting-edge technology -- and helped enrich their executives -- by getting discounted shares from startups while they evaluated equipment (see Bross Rides the ONI Gravy Train). Qwest was among the most startup-friendly of them all. But as the Nasdaq bubble popped and the IPO market shut down, such strategies lost their allure.

A prime example of this has been the tight relationship between Kleiner Perkins Caufield & Byers partner Vinod Khosla and Qwest. Khosla, who is a board member of Qwest, also held board positions at Corvis Corp. (Nasdaq: CORV), CoSine Communications Inc. (Nasdaq: COSN), Cerent (now owned by Cisco), Juniper Networks Inc. (Nasdaq: JNPR), and Redback Networks Inc. (Nasdaq: RBAK), while each of these equipment vendors negotiated deals with the carrier.

Here's an example of how it worked with CoSine Communications: Qwest helped CoSine design, test, and analyze its equipment, a Qwest spokesman confirmed. In return, CoSine let some senior Qwest executives -- including former executive VP of corporate development, Marc Weisberg; executive VP and general counsel Drake Tempest; and executive VP and chief strategy officer Lewis Wilks -- buy "friends and family" shares before the startup went public.

CoSine went public in 1999 and, in February 2000, it announced that Qwest had placed a multimillion-dollar purchase order for its gear.

Also, Qwest got warrants for agreeing to buy Tellium Inc.'s (Nasdaq: TELM) gear. Qwest executives accepted some $10 million worth of stock options from the startup in exchange for being allowed into its network (see Tellium Switches IPO Bankers).

There are plenty of other examples, but the bottom line is that Qwest wrote the book on how to forge strong ties with the venture capital community. Now its own slowing business has forced it to begin a more pragmatic approach to evaluating startup equipment.

"They are joining a growing chorus of ILECs in a Darwinian procurement process by emphasizing interoperability, Osmine and NEBS certification -- things that only top-tier vendors and mature startups can accomplish," says Kris Shankar, VP for marketing and business development at Metro-Optix Inc., a startup that reportedly is in trials with Qwest (see Qwest Tests Metro-Optix).

Regardless of Qwest's posturing, hope remains for startups that have solid and unique products. "Most carriers have assured startups there is still a market for well differentiated products in niche applications," Shankar says.

"Good startups will still get orders," says Van der Meer at ComVentures. "It'll just take time."

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com