No matter whether you see it as venture capitalists getting pickier or problems with the stock market, the venture capital market is as dry as the Sahara. Possibly even drier. If you’re a wireless startup, you might as well live in Death Valley as far as venture capital is concerned.
Research firm PricewaterhouseCooper projects that venture capital for the entire telecommunications industry – from routers to chips and everything in between – will be just $3.7 billion in 2009, a 60 percent drop from the $9.4 billion spent on networking related companies in 2008. If the run rate for wireless investments holds steady, the segment will only see about $248 million in 2009, a 75 percent drop from 2008, when it received $984 in venture capital funds.
“Venture capitalists are taking money to support their existing portfolio and have really cranked back on new spending,” says Tracy Lefteroff, PricewaterhouseCoopers’ global managing partner for private equity and venture capital.
The firm estimates that seed-stage companies got only $8 million of venture capital funds during the first quarter of this year – and that’s one or two deals for the entire telecommunications industry, not just wireless. In the wireless segment, startups got no money whatsoever in the first quarter.
The credit crunch and volatility in the stock market are going to be around for some time to come, even with recent glimmers of hope in the earnings reports of Wells Fargo and Citi Group. While macroeconomic conditions have put a huge damper on the market, it’s also put potential investors at a strategic disadvantage.
If firms do decide to invest in a business, they may be stuck with it for a long time, an unattractive proposition for VC investors. “It’s not just the market itself, it’s been that there have been no exits at all,” Lefteroff says.
EXPANSION BEATS SEED
Right now, VC firms are focused on supporting their existing investments instead of branching out into new areas. Seed stage companies received no money and only two deals were done for early stage companies, which received $3.95 million.
By comparison, expansion companies in the wireless segment got the most money in the first quarter of 2009, with seven deals valued at $34.2 million. Later stage companies also benefited, with six deals valued at $24.1 million.
The same held true for the telecom industry as a whole. Expansion-stage companies received $769 million, compared to the $165 million spent on early- and seed-stage companies.
Despite the numbers, Justin Perreault of Commonwealth Capital Ventures says there’s still plenty of cash floating around – the bar has just been set a little higher. “I think wireless specifically is perceived as a relatively attractive space compared to other sectors. The reason is in the numbers: More and more of computing is getting done on smartphones, and whenever you have that big of a migration to another platform, people notice,” Perreault says. “Wireless is probably in the top three or four sectors people are thinking about.”
FOCUS ON USE CASE
Given the turmoil in the global macroeconomic environment, venture capitalists are being exceptionally prudent with their cash. The only way they’ll spend is if there’s a significant return-on-investment potential. “There’s so many new technologies that flow through the wireless industry, a lot of time people talk about them as if they are an end to themselves, but what’s the use case?” Perreault says. “Sometimes the market finds the use case, but there are a lot of things thrown into the markets that don’t catch on. [Venture capital firms] tend to be a little more user-focused.”
He cites green technology and enterprise solutions as attractive segments for venture capitalists. Green technologies’ cost-saving potential is attractive to companies regardless of its associated environmental benefits, and businesses are increasingly drawn to wireless products to streamline operations and increase efficiency.
On the flip side, venture capital tends to stay away from businesses with very low barriers to entry. While app stores may be a good business model for Apple and a small selection of successful developers, the low barriers to entry create an intensely competitive, hit-driven environment. “It’s a tough model for venture capital to fund,” says Perreault. “It’s not clear how much any one app is going to generate in terms of revenue.”
It’s not always been easy for venture capital to find a welcoming home in the wireless segment. Large carriers like Verizon Wireless can make or break startups – they decide who gets on their networks and who makes money off of them. With platforms opening up a bit, that could change, but significant barriers to entry still exist for new entrants.
Historically, carriers have not been good at selling true enterprise solutions. This creates huge opportunities for startup companies that manage to secure partnership with major operators.
Perreault’s advice? Keep the use case in mind, focus on niche segments and growth areas where there’s a possibility of partnering with large incumbent players… and be prepared to wait a long, long time for those venture capital funds to start flowing in.
Filed Under: Infrastructure