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Optical/IP

Startup Shortage

Light Reading editors have been out prowling the universe of startup funding, trying to figure out what new startups are hot. We are in the midst of compiling a new list, the “Top Ten New Startups to Watch.”

The results, so far, have been bit perplexing. After all, we can't publish a list of 1,000 teen-targeted mobile content companies and 100 user-generated content Websites.

Indeed, there will be some application and content companies on our list. What about infrastructure startups? The first problem, of course, comes with the word “new.” Many of the “startups” we found, were in fact, at least three to four years old. And there were very few infrastructure startups formed in the last 24 months.

Mostly we had to look in places other than core telecom technology to find the most recent startups. The thing about those clever venture capitalists, of course, is they always seem to have the same idea at once. Once you expand to the realm of digital media or wireless applications, the list of startups explodes.

Why venture capitalists always move in such packs is a mystery to me. Maybe it’s that VCs really are the same as Joe-Q public investors – they like to migrate where the latest fad or momentum is. Herein may lie the secret to why certain telecom infrastructure startups, rather than the faddish user-generated content startups, might be the ones to watch here.

After all, how much innovation comes from so-called "user-generated" sites, such as YouTube. YouTube is useful and entertaining, but I have a hard time seeing it as the next Disney Corp. Primarily, the site specializes in distributing thousands of hours of jittery video clips, much of it belonging to someone else. Imagine your cable company filling up your channel lineup with hundreds of community access channels. That's YouTube.

What about real enabling technology? The kind that, rather than filling up pipes with grainy footage of fraternity videos, can reduce distribution or delivery costs by a factor for 10 or more? There doesn't seem to be a whole lot of investment in this type of stuff going on.

I’ve mentioned before that the telecom investment cycle tends to run in about 10-year patterns. This is how long it takes service providers to exhaust the older technology and require something new be put in place.

The last major run on networking infrastructure technology, as we know, was in 1999-2000, when carriers underwent massive upgrades of their fiber optic backbone infrastructures. You could argue that another investment cycle got underway in 2004/2005 in the access market, as the carriers focused on hooking up the pipes to the customers that would feed this massive core infrastructure upgrade.

So what should we look for in mid-2006? It now turns out that very few infrastructure startups of any kind are being started up. Think of the last time a cutting-edge core router startup was founded. Can you think of any? There was Procket, but that company was incorporated in 1999. (See Procket Reaches 'End of Life'.) What about edge routing, optical switching, or even wireless backhaul? I’d guess that the number high-profile startups in these markets in the last two years totals less than ten.

Where does that leave the carriers in 2008-2009, when they will arguably be ready for new technology that (1) helps alleviate new bottlenecks in the core from the dozens of user-content creation and wireless applications companies the venture capitalists have funded; and (2) helps the carriers get ready for another core infrastructure upgrade cycle?

The answer, of course is: Deep doo-doo. There won’t be any new core infrastructure technology!

A prime example of this phenomenon is Infinera Corp. (Nasdaq: INFN), one of the last great infrastructure startups. Infinera has figured out how to lower the economic barrier to upgrading to 100-Gbit/s optical links. Apparently very few companies have been working on this.

Nearly every carrier technologist I’ve spoken to in the last three months has mentioned Infinera, and how they love the technology. They don’t mention anybody else. Why is that? Well, first of all, apparently Infinera has some very attractive technology. But more importantly, it appears to be the only company that’s been working on a big, big infrastructure problem! Infinera is the lone wolf of core optical newtorking – and it's going to enjoy the spoils in what has been, remarkably, an uncrowded space.

The thing is, Infinera, which is prepping for an IPO, isn’t really even “new” anymore. It’s moved well beyond the startup phase with millions of dollars in sales. Amazingly, Infinera was started back in 2001! That was a sort of dead zone for telecom investment as the bubble came crashing down. But what’s next after Infinera? There appears to be even less new technology on the horizon. In fact, I can't think of one interesting optical networking company formed in the last three years. Can you?

Now, imagine where we are four or five years from now. The world will be deluged by 2,000 moblie content applications and 1,000 user-generated content Websites, including 50 knock-offs of Youtube.com. The only problem? The infrastructure won’t be able to handle it, because no new enabling technology startup techology is being developed, and the R&D budgets of large companies have been slashed to the bone.

Get to work, startup world. Meanwhile, if we're missing something in that world, please drop us a line at [email protected].

Our list of "Top Ten New Startups to Watch" will be published this week.

— R. Scott Raynovich, Editor in Chief, Light Reading

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sfwriter 12/5/2012 | 3:48:33 AM
re: Startup Shortage Judging from the number of social networking startups in Silicon Valley, that's where the VC money is. Do we really need any more?
Scott Raynovich 12/5/2012 | 3:48:32 AM
re: Startup Shortage Right. My point being we are overfunding one area and ignoring others.

Right now VCs are focused on Web sites and applications. But eventually the infrastructure needs to be upgraded.
Scott Raynovich 12/5/2012 | 3:48:32 AM
re: Startup Shortage I'm curious what the lack of interest in infrastructure startups means. Anybody got ideas. Is it:

1) They are too expensive, and until the IPO market comes back, there's no use
2) Telecom infrastructure has been commoditized. You'll soon buy it at Wal-Mart. In the future, all this gear will just be developed by big-company R&D, not VCs
3) The investors are being dumb, or short-sighted

or all of the above?

I'dRatherBeFishing 12/5/2012 | 3:48:32 AM
re: Startup Shortage A few points...

VC's like to avoid high burn, as is the case w/ HW startups. So if there's a software play somewhere, I'd bet that's where the money is going.

Also lots and lots of consolidation in the industry. Not many startups can even make sales unless they are afiliated w/ a larger company. So many customers have been burnt by startups that have closed, it only makes sense for them to buy from major players. One more reason for VC's to be wary.

I'd say the average HW startup cost is still in the area of 60 Million before it's even close to making a profit, so there's the dilution factor for original firms, and the continued case of going back to the VC well time and time again.

Lastly, what makes the author so sure that the current vendors are not actually building improved euquipment planned for delivery in 2007 or 2008? A bit short sighted I'd say. What else are ya gonna do with a few thousand engineers per big company?
sfwriter 12/5/2012 | 3:48:31 AM
re: Startup Shortage I agree with the point about VCs avoiding high burn and the effects of consolidation.

Ivan Seidenberg talks about how the telecom industry is one of the last industries to both enter and leave recessions. The Web industry entered it first and exited it first. My guess is that telecom won't be far behind.
Scott Raynovich 12/5/2012 | 3:48:31 AM
re: Startup Shortage So I guess we have to look forward to the telecom industry becoming more like the car industry -- evolutionary rather than revolutionary.

It's either wait for big company R&D, or do it yourself. If you want to soup up your router, you buy the alloy rims in the aftermarket.

Scott Raynovich 12/5/2012 | 3:48:31 AM
re: Startup Shortage good points, all
optiplayer 12/5/2012 | 3:48:31 AM
re: Startup Shortage Reasons VCs aren't backing telecom infrastructure plays:

1. High cost. For big optical systems, core routers and most carrier grade gear its $100M+ to get a product to lab evaluation phase. More to get meaningful revenue. The risk-reward profile is ugly.

2. Carrier consolidation. There are 3 Tier 1 carriers in the US, soon to be 2 and they generally won't buy from start-ups. They also take 2-3 years to evaluate a product. Tier 2 and 3 carriers are also consolidating (L3, CLECs, etc.) which doesn't help and I don't think one can make a public company selling only to the local independents (see Calix). International customers are also consolidating and selling internationally as a small company is brutal and costly.

3. Few successful exits. Look at Movaz - hot optical company turned disasterous exit in less than a year. What the heck happened there? Calix, Force 10 and now Infinera are constantly rumored to be prepping an offering but not one has yet to file an S1. Same for Airvana and Cedar Point.

4. Large vendor consolidation. Many of the potential buyers (LU, ALA, SI and NOK) of small companies now have their hands full with massive integration work and likely won't be shopping for a while.

5. General perception that most of the HW will be commodity and the "value add" will be SW, content and services.

Scott Clavenna 12/5/2012 | 3:48:31 AM
re: Startup Shortage Actually, I tend to agree with the latest poster here. The big firms do have pretty solid infrastructure products coming out of their R&D that a VC-backed firm would currently find it hard to match, given limitations on burn rate, exit opportunities, etc. Alcatel's TSS 1850 is one example, in the optical world. Cisco's CRS-1 another. Foundry has a big core switch/router as well. Siemens rolled out new metro DWDM and anhancements to long-haul DWDM recently, and Ciena is adding ROADM to the 4200. So if you are a VC looking at major infrastructure opportunities, I would certainly worry about the optical, Ethernet and the router markets, where you must immediately face giants who are consolidating and bulking up "solutions" that come with extensive professional services.

Outside of optical, Ethernet, and routing, there is mobile infrastructure, but there again Ericsson, Nokia, Siemens, and Huawei haven't exactly been sleeping, so it would be very tough to get excited about new HW startups in that space as well. Particularly given the uneven start 3G is having around the world, and the continued reliance by major mobile operators on large suppliers in support of fixed mobile convergence and IMS.

You have to nibble around the edges with hardware these days, and VCs are doing that very cautiously. Perhaps that is indicative of over-cautiousness after the burst bubble, but consolidation and Huawei/ZTE have made the infrastructure market quite scary for most, and for good reason.

Scott C.
Scott Raynovich 12/5/2012 | 3:48:30 AM
re: Startup Shortage Well now, Internet Protocol has been a bit disruptive. That's independent of bubbles or deregulation.

It may now be another 50 years before we see anything like that again, especially if venture financing goes away for the long term.



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