Does Sevin Rosen fund closure foretell tough times for wireless/telecom companies?

October 9, 2006

3 Min Read
VC Firm Gets Cold Feet; Startups Sneeze

Describing the environment for high-tech venture funds as "terribly weak," Sevin Rosen Funds , a venture-capital firm with large bets on telecom and wireless companies, said over the weekend it is abandoning its "Fund X," or tenth fund, and returning money already collected to investors.

Though hardly unprecedented -- several funds returned money to investors during the crash of the early 2000s -- the move, the firm conceded, is "radical." The question now is, what does it imply for future funding for startups in wireless and telecommunications?

Founded 25 years ago, with offices in Dallas and in Silicon Valley, Sevin Rosen has backed several seminal tech companies, including Compaq, Lotus, and Cypress Semiconductor Corp. (NYSE: CY) More recently it has moved aggressively into wireless, backing infrastructure providers like MetroFi Inc. and Wayport Inc. as well as wireless-management startups like Traq Wireless. In a letter to investors announcing its decision to abort the fund (first reported over the weekend by The New York Times), Sevin Rosen wrote, "While good returns from any given firm’s portfolio is certainly a possibility, the statistics have clearly shifted in an unfavorable direction. The venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels."

That depends on how you define "insufficient levels," according to other VCs who remain bullish on backing telecom and wireless startups.

Acknowledging that "The IPO market certainly isn't what it used to be," Fred Wilson, a partner at Union Square Ventures in New York, notes on his blog that the mergers and acquisitions market, by contrast, is quite healthy. "Maybe they can't get us the valuations 'that venture investors expect' [as the Sevin Rosen letter put it], but that is the venture industry's fault," adds Wilson, "because we've overfunded our companies to the point where we need a half-billion-dollar exit to produce a decent return."

The telecom sector, Wilson says, has moved on from "the phase where the infrastructure gets built," to "the phase where the services get deployed on top of that infrastructure." That means that straight infrastructure plays -- even cutting-edge ones like MetroFi, which is dedicated to building a nationwide WiFi-based broadband network -- will not produce the returns that venture investors have grown accustomed to.

Others in the relatively small and venture capital community speculate, off the record, about possible tensions between the partners at Sevin Rosen, and note that VC firms that have closed down funds in the past have often made public pronouncements about the weakness of the market as a form of cover for problems in their own operation.

A spokesperson for Wayport, which has been backed by Sevin Rosen since its first round of funding in 1998, said the firm declines to comment on the Sevin Rosen situation at this time.

It's also worth remembering that Sevin Rosen still controls hundreds of millions of dollars from previous funds and that this move hardly indicates that it is abandoning the field altogether.

At the very least, however, the Sevin Rosen decision forecasts a tougher market for wireless and telecom startups in the next few years. It also means that executives at those startups dreaming of big payoffs via IPOs might have to dial back their expectations a bit.

— Richard Martin, Senior Editor, Unstrung

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