VCs: Startup Opps Still Abound
In his keynote talk here, Hauser hammered home the point that venture investing in optical and telecom technology companies is a long-term move and has more benefits than a financial payoff. In a packed room here that quickly ran out of empty seats and fresh air, Hauser urged large companies to do a better job at partnering with small companies but noted the task isn't easy because large companies are focused on self preservation, not new job creation.
What's discouraged big corporate investors is the market's overreaction to the opportunities in optical and storage area networking. For a few years, the market was overexcited about the potential of new technologies. "Now, they've overreacted the other way," he says.
Despite the overreactions, though, the demands on carrier networks are steadily growing, with more online users and more data applications. Intel Corp. (Nasdaq: INTC) founder Gordon Moore still jokes that Moore's Law -- his observation that the number of transistors in semiconductors doubles every 18 months -- can only continue for about 10 more years, something he's said every year since the 1960s, Hauser says. But at this moment, he adds, the performance of optical technologies doubles every nine months, and the performance of storage technologies doubles every twelve months.
"Carrier traffic was growing 300 to 400 percent during the frothiest months of last year," says Richard Norman, president and CTO of Hyperchip Inc. "But at the market's bleakest point, traffic was still growing about 100 percent a year."
Furthering his argument that there are still plenty of venture opportunities both in Europe and elsewhere, Hauser points to the "30-times mismatch" between the bandwidth available at the network's core and the bandwidth that's consumed by end users.
"Ironically, the U.S. networks are suffering from antiquated copper and cable plants and low population densities," he says, noting that investments in the network's last mile are sorely needed.
Despite such need for new investment, however, everybody also concurred the the current crowd of startups is thick and in need of weeding -- as more money is plowed into the stronger ones.
There were more than 300 optical systems and components companies created in the optical startup boom, according Hossam Galal, director with Carlyle Venture Partners. Rather than just letting most of those companies die, company directors should consider either extracting technology out of some companies and adding it to other ventures, or combining several startups into one company.
"There are rollup opportunities -- you can put some of these non-differentiated players together and create a more muscular player," said Galal in a venture panel.
Naturally, even with consistently growing demand for networking technologies, making money off young investments is still tricky business. Startups that don't time their product to the market's needs may quickly find themselves out of business.
"The problem is that every 18 months somebody comes out with a new widget," says Optical Capital Group CEO John Spirtos. "If you can't figure out how to make money on an investment in 36 months or less, you need to get out of that business model. Equipment is like Kleenex, you've got to be able to use it, chew it up [!], and get onto the next thing."
But after being stung by the market's overreactions to new technologies in the past year, venture capitalists are slowly unclenching their wallets and starting to do deals again. "VC activity is picking up," says Hyperchip's Norman. "If it doesn't seem that way it's because Wall Street tries to act six months before the industry moves, and VCs try to stay six months ahead of Wall Street."
What remains to be seen is whether the big telecom companies and carriers will ante up for the future.
- Phil Harvey, Senior Editor, with R. Scott Raynovich, Executive Editor, Light Reading