Imagine walking into your kitchen, punching a few codes onto a flat panel screen on your refrigerator and pulling up a full list of your inventory of food. You discover you’re low on milk, cheese and, say, your favorite snack, so you key in a few more numbers to quickly replenish those supplies from online grocers like Webvan Group Inc. or Peapod Inc. Or, imagine there is a Web pad resting on the night table next to your bed that is connected to a variety of household appliances that allow you to place orders, conduct research or simply check your e-mail.
These capabilities might not be commonplace, or even available, in homes across the nation right now, but a host of venture capitalists are placing bets that this type of advanced home networking will soon play a very important role in our daily lives.
The first home networking tool, Interactive TV, is still in its infancy. One example is WebTV, which allows subscribers to send e-mail, surf the Net and take part in game shows and polls all from their TV sets. But VCs clearly foresee the existing concept of home networking being taken much further.
“Home computing today as we know it will not exist in a few years,” predicts Michael Hirshland, a general partner at Polaris Venture Partners. “There will be a seamless combination of what we think of as Internet access, together with voice and video, to perform a whole range of applications that involve the combination of three mediums, and we’re going to have an entirely different platform from which we do that. It’s going to be different from a television, it’s going to be different from a phone, and it’s going to be different from a PC.”
The strict definition of home networking is simply the ability to link a series of home computers to the Internet. But with the growth of digital subscriber lines (DSL) and cable modems in residential areas, entrepreneurs and VCs alike are looking for new and innovative ways to make homes communicate with the outside world in a creative, faster, cheaper and more efficient way.
“People used to say, Why do I need that kind of bandwidth in the house,'” said Randy Hawks, a general partner at Novus Ventures, who invests in home networking deals as it relates to broadband deployment. “And then the Internet started taking off, and there was the creation of this rich content, and suddenly people began saying, If I had this bandwidth, I could watch a movie online or a replay of the Super Bowl.’ Now they say, I need greater bandwidth, and how can I get it?'”
There is some disagreement as to when broadband connectivity will actually reach critical mass in homes, but most VCs agree it should take place within the next one to three years. Polaris stands on the bullish side of that debate, predicting that the widespread arrival of home networks that provide rich content will be sooner rather than later.
“It’s a combination of the maturation of applications on the Web and the rollout of broadband,” said Hirshland, explaining why there’s a growing need for greater bandwidth in homes. Besides, the need for interactive TV and the downloading of audio and full motion video are more likely to take place at home rather than in the office, he added.
The growing affordability of home networking, which makes it possible to bring office or commercial-grade local area networks (LANs) to the home rather cheaply, is another reason for its growing popularity. Also, Moore’s Law, which states that the power of computers doubles about every 18 months, now also appears to apply to the speed and availability of bandwidth to the general public.
“Everyone is interested in the space right now because there’s been a dramatic decrease in price and an increase in performance over the last year or two,” said Wayne Nemeth, vice president of the Sprout Group. “The other thing that’s probably driving it is the access to broadband to the home; once you have that access, it warrants you spending more money on the internal networking equipment at home.”
Hirshland, for example, recently invested $10 million in Ucentric Systems, a company that’s developing a home area network to seamlessly connect computers, televisions, stereos, telephones, Web pads and the next generation of Internet appliances in order to receive video or voice streaming content. The idea is to have a central hub at home for all broadband content, which then can be simultaneously retrieved from a host of household devices.
“We certainly recognize a trend in which a lot of people, including ourselves, are expecting tremendous growth in various home uses of the Internet, particularly with the arrival of broadband,” says Hirshland, whose firm backs early-stage information technology and life sciences companies.
Sprout’s Nemeth, last year invested in Reflex Communications Inc., which provides high bandwidth to apartment and condominium complexes. Related Sprout deals include RhythmsNetConnections, which is in the DSL services market, and Paradyne Networks Inc., which is on the equipment side. Sprout, which invests in telecommunications and e-commerce, has fully invested its $860 million Sprout VIII and is preparing to raise Sprout IX, targeted at more than $1 billion.
The Sprout Group makes investments in the access technology subset of home networking – companies that provide equipment and services – because of the growing availability of DSL and cable modems in homes. Originally wired for voice communication rather than for data, most residences must now be rewired to accommodate data networks that support Internet content. Sprout sees great investment opportunities in this so-called “last mile” of a home-networking infrastructure, which refers to the “piece that goes from the central office to the actual home,” Nemeth said. The firm has closed five deals in the access technology arena over the last two years, and the public is willing to pay for such services because applications on the Internet now require much greater bandwidth, he said.
“Web sites are more complex, with streaming audio and streaming video becoming more attractive, and it’s just painful to search the Web these days with a 56K modem,” he aded.
Novus Venture’s Hawks echoes the same views, saying his firm aims to take advantage of young companies that create innovative ways to rewire existing residences. One such area of investment is wireless technology, which makes it possible for home networks to communicate on short radio wave frequencies rather than having to tear down a wall to rewire an entire house, he said.
At press time, Novus, had not closed any recent home networking deals, but was reviewing two companies – one that offers a LINUX-based network server and another that builds high-speed integrated circuits that could be used in data and telecommunications appliances at home.
In short, the growth of home networking is simply a natural evolution of what took place in the workplace: Offices started creating networks to better communicate and to collaborate with work.
“That same thing is true in the home environment, especially as the workforce is blending and integrating work and home life together,” Hawks said.