VCs Work a New Angle
SAN JOSE -- Opticon 2001 -- The cold reality for many startup communications companies is that many competitive local exchange carriers (CLECs), once thought to provide a large market for cutting-edge communications technology, are running out of money or have gone out of business.
Venture capitalists on panels here at Opticon have come up with one possible solution: Systems companies might want to compensate for the lack of CLEC customers by selling their technology to enterprise customers first.
"Enterprises have built these huge internal networks, and we can think of them as greenfield carriers," says Barry Eggers, a general partner at Lightspeed Venture Partners (an investor in Light Reading).
Accel Partners' Peter Wagner adds that by selling technology to enterprise customers first, the startups can expose the large telecom service incumbents to new products originally meant for new CLECs.
Its hard to say to what extent this will play out. "The buzz in the industry is that the enterprise market will turn around and recover first. Perhaps some folks are just looking for a quick return on the investments they've already made," says Amra Tareen, general partner with Sevin Rosen Funds.
Trying to get into the door of incumbent carriers is tough and won't be possible for most of the optical startups that are in business today. "Eighty to 90 percent of the capital spending in North America is being done by six to eight people in the largest service providers -- the same people who were doing it in the early 90s," says Eggers.
The limited number of buyers, coupled with the 12- to 18-month sales cycle for large carriers, stacks the deck against startups. Tareen says startups now have a 10 percent to 15 percent survival rate, and optical systems companies are going to find it harder to get funded. "I don't think anyone's going to fund a box that will require $200 million in invested capital to get to profitability," she says.
In response to the crashing communications market, many venture capitalists are looking for opportunities that help service providers make more money from their high-margin voice telephone businesses. Tareen sees opportunities for equipment that enables carriers to add services to the public switched telephone network (PSTN) by way of an IP data network.
Of course, there are only so many services a big carrier can support. Gary Morgenthaler, of Morgenthaler Ventures, says the reason digital subscriber line (DSL) service has become a money-loser for big carriers is because of the support costs involved. Others concurred. "Service providers can't train technicians on more than one service a decade, let alone adding new services each day," says Wagner. "There are carriers that are still patting themselves on the back for frame relay."
Other VCs see opportunity in helping cable companies beat incumbent service providers at their own game. "When cable providers can offer voice-over-IP over coaxial cable, then the ILECs will have a competitor that offers data, voice, and video over something that performs better than twisted pair," says Michael Duran, a partner with Patricof & Co. Ventures Inc.
Morgenthaler says he's investing in "the war between incumbents and cable operators" but adds that he won't make an investment on the residential front for "at least the first part of this decade."
The bottom line for venture capitalists: They must pick which of the technologies they funded in years past -- optical grooming switches, passive optical networks, Ethernet service gear -- are still viable and worth continued investment, as opposed to those new technologies that may be worthy. Overall, the rate of investment in new ventures is likely to continue slowing (see Venture Funding Plummets).
- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
Venture capitalists on panels here at Opticon have come up with one possible solution: Systems companies might want to compensate for the lack of CLEC customers by selling their technology to enterprise customers first.
"Enterprises have built these huge internal networks, and we can think of them as greenfield carriers," says Barry Eggers, a general partner at Lightspeed Venture Partners (an investor in Light Reading).
Accel Partners' Peter Wagner adds that by selling technology to enterprise customers first, the startups can expose the large telecom service incumbents to new products originally meant for new CLECs.
Its hard to say to what extent this will play out. "The buzz in the industry is that the enterprise market will turn around and recover first. Perhaps some folks are just looking for a quick return on the investments they've already made," says Amra Tareen, general partner with Sevin Rosen Funds.
Trying to get into the door of incumbent carriers is tough and won't be possible for most of the optical startups that are in business today. "Eighty to 90 percent of the capital spending in North America is being done by six to eight people in the largest service providers -- the same people who were doing it in the early 90s," says Eggers.
The limited number of buyers, coupled with the 12- to 18-month sales cycle for large carriers, stacks the deck against startups. Tareen says startups now have a 10 percent to 15 percent survival rate, and optical systems companies are going to find it harder to get funded. "I don't think anyone's going to fund a box that will require $200 million in invested capital to get to profitability," she says.
In response to the crashing communications market, many venture capitalists are looking for opportunities that help service providers make more money from their high-margin voice telephone businesses. Tareen sees opportunities for equipment that enables carriers to add services to the public switched telephone network (PSTN) by way of an IP data network.
Of course, there are only so many services a big carrier can support. Gary Morgenthaler, of Morgenthaler Ventures, says the reason digital subscriber line (DSL) service has become a money-loser for big carriers is because of the support costs involved. Others concurred. "Service providers can't train technicians on more than one service a decade, let alone adding new services each day," says Wagner. "There are carriers that are still patting themselves on the back for frame relay."
Other VCs see opportunity in helping cable companies beat incumbent service providers at their own game. "When cable providers can offer voice-over-IP over coaxial cable, then the ILECs will have a competitor that offers data, voice, and video over something that performs better than twisted pair," says Michael Duran, a partner with Patricof & Co. Ventures Inc.
Morgenthaler says he's investing in "the war between incumbents and cable operators" but adds that he won't make an investment on the residential front for "at least the first part of this decade."
The bottom line for venture capitalists: They must pick which of the technologies they funded in years past -- optical grooming switches, passive optical networks, Ethernet service gear -- are still viable and worth continued investment, as opposed to those new technologies that may be worthy. Overall, the rate of investment in new ventures is likely to continue slowing (see Venture Funding Plummets).
- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
ownstock
12/4/2012 | 7:56:47 PM
re: VCs Work a New Angle
jmd...Agree on triage of most of the portfolio. Euthanasia is kinder than lingering death.
But move on to more neuvo-widget or box or system ideas that may never pan out? Enterprise = low margin waste land. No thanks.
There is one strategy that can pan out: cheaper.
Making products that have proven sales, even in this market, at dramatically lower COGS, is going to payoff in any market, any time.
Old fashioned idea: make "it" at dramatically lower COGS than your competition, then you have made the market effectively supply limited: your supply limit. Their price, your COGS. You control your competitions margin...and sales...it's called total market domination.
Look for start-ups that have an "unfair edge" in COGS for their products, in existing high margin markets. Long haul (to pick an example) is still there, and a start-up with ability to undercut prices can grow at its choosing.
A logical, low risk, killer business strategy should be "hot" these days...we've tried high risk, illogical and it didn't work...
But thats' JMHO...
-Own
jmd
12/4/2012 | 7:56:44 PM
re: VCs Work a New Angle
Own,First quickly kill off past mistakes by merging, canalizing, partnering, restructuring & selling (nothing wrong with a steady revenue stream GÇô no matter how small) GÇô whatever you need to do, do it quickly. Then start looking for new ideas, new markets, new ways of doing things. Focus on seeding, not bringing to IPO GÇô cover the landscape instead of making a few deep vertical investments. Create the fodder that will rise with the next tide.
IGÇÖve heard the comments in first person and IGÇÖve also read them GÇô VCs are looking for profitable businesses to fund GÇô bullshit, thatGÇÖs what banks are for. IGÇÖve also heard the VC are not interested in buyout plays GÇô bullshit again. VCs are for getting out on the edge and priming the innovation engine. Most of their seed investments are supposed to fail but every now and then one of them turns into a mountain.
The GÇÿexecution eraGÇÖ is over. You can no longer throw names and bucks at a cookie cutter business plans and be assured of a smashing success. Now is the time to look for innovation.
As for where to move:
YouGÇÖve mentioned a great indicator for good investment GÇô a much cheaper way of doing something that already exists. Works best when you got a lock on it and threaten the hell out of the incumbents and either end up with their revenue or get bought out by them.
How about B2C instead of B2B/enterprise? Very explosive stuff dude.
Rid the world of spam. Filter out all the crap GÇô hell I dunno. Obviously, I donGÇÖt know where to move to GǪ but I do know a move is needed and what not to do - can I get -+ marks at least and be a critic?
ownstock
12/4/2012 | 7:56:42 PM
re: VCs Work a New Angle
jmd:Agreed, move onto something with fast bite. Aka: fast traction. That's gotta be a lot better than listening to "next quarter..." or "next round..." promises, or worse yet: "we'll know better as soon as we get the new growth run from the reactor processed and characterized"...
As to VC motivation: it is fast bucks, period.
It should be. Mine is too, definitely. Greed is good.
But you got to admit that VC-DD was (still is)largely limited to asking the VC next door:
wazhotdude?.
Consequently, their idea of how to add shareholder value is pumpanddump, spinitup, hype-o-rama to the investment banker! So now they are caught up in their own game and are pulling at straws.
Suggestion: Next board meeting, new business strategy introduced by outside director-investors to Founder-CEO:
"Word up b____! Get out and make me some mo-neh, an' don'gimme no lip or magonna beat yo' a__!"
Pretty clear who's who and what's what in that arrangement...
-Own
Sparxe
12/4/2012 | 7:56:32 PM
re: VCs Work a New Angle
I'm an FO Investor and here is my two cents:
Driving home from out of State last night I was floored by how many Carriers are out there trying to hustle customers. In 15 miles I saw 27 Billboards. (in Pa) Gimme a break.
Its so f-in obvious that there are too many suppliers and providers of Optic bandwidth who are way ahead of the buying curve. True, they will commoditize the services and hardware to a point that people may actually start buy it (low low pricing).
Anyhows, my advice to a start up is: DON"T do it. Go find an existing business that has sales channels in place. The VCs will pick your bones and your IPO won't happen.
I predict a HUGE consolidation in the OF space. With so few buyers it would make sense for sense for all these good tech-no reach companies to group up. How do you think Lucent and Nortel got so big. They are (were) one stop shops. Buyers don't want to deal with 50 vendors to make a network. I see the suppliers wising up and forming consortia type enterprises, that take advantage of the economies of scale.
One-trick-pony, over valuated Telecom suppliers are going to visit the dinosaurs. only they don't know it yet. Like so many other things, size does matter.
Sparxe Nj
Kill off some of those GÇ£investmentsGÇ¥ - itGÇÖs clear many are going to turn out poorly GÇô end them sooner than later and avoid wasting efforts. That way you can devote more attention to those few that are likely to succeed. More importantly times like this are times when the focus should be on innovation GÇô not execution. VCs should be more interested in intellectual property potential and new markets than current revenue streams at this point. After all weGÇÖre in a trough and what pulls the technology sector out of troughs are innovations and new spaces not measly revenue streams attached to yesterdayGÇÖs overblown ideas.