Georgis was right.
If we don’t convince ourselves – or better yet, convince the carriers and communications equipment companies – that at least some of those technologies are worth recycling (if not buying on the cheap) before they’re gone for good, we’re simply destined to let history repeat itself. Destined to spend our limited partners’ money two to three years from now on the very same technologies we helped fund just two to three years ago. It will be a very expensive mistake indeed.
This is a warning – and an opportunity.
Network Photonics, which shut down in April, is a good illustration of the confounding situation that the venture industry faces. The Boulder, Colo.-based optical switching company raised more than $120 million in venture capital funding since it was founded in 1999. Among its investors were New Enterprise Associates, Siemens Venture Capital, Spectrum Equity Investors and U.S. Venture Partners.
Network Photonics reportedly returned about $30 million to its investors, but that still left them $90 million in the hole. And what of all those years the company had spent developing its technology. Was it all just a waste of time?
I propose we start taking a 10-year view of the innovations we’ve already created and those the market is most likely to need in the future – and then do something with that accounting.
Raise Your Voice
It’s been estimated that in the long-term broadband technologies alone can lift GDP by half a percentage point. Knowing that, we should be screaming like hell to have the carriers and communications equipment guys take advantage of the technologies we’ve already funded, even if all they might do is toss it in the closet for safe keeping.
“Big companies alone do not have enough resources to pursue the innovation curve,” says forward-thinking VC Matt Howard, a principal with Norwest Venture Partners. His comment seems particularly true when you consider that R&D budgets have been cut to the bone.
If broadband technologies have already been VC-funded and developed, why not do all that we can to recycle them into some form of usable intellectual property for the future? As Howard notes, of the core optical switching companies funded over the last five years, all but one or two are dead. That might not matter now, but ultimately it will matter when the market begins to work off all of its excess capacity.
Moreover, as another telecom carrier senior executive notes: “There’s still room for a turnaround in the core router space given that carriers have to replace certain core routers every 18 to 24 months.”
He goes on to say: “As voice and data traffic keep rising, IP traffic is to increase annually by a factor of two on major network backbones. This creates major bottlenecks at backbone nodes causing carriers to look for less costly and more scalable solutions.”
If those solutions in the short term are to find the cheapest transition from ATM networks to IP/MPLS systems, the longer term will demand solutions for which technologies have already been developed.
I’m not simply suggesting a wholesale acquisition of all of our “living dead.” That’s one way of approaching the problem, but one with limited opportunities at the moment.
Robert Abbe, managing director with technology investment bank Broadview International, points out: “No one, I repeat no one, is going to absorb anyone else’s problems, let alone their burn rates. It’s all about risk reduction, not just with the financials, but also with the technology itself. Companies are far more likely to co-market or OEM a product before they would even think about acquiring.”
Though Ciena bought private edge switching company Wavesmith, Tellabs purchased Vivace Networks and Alcatel acquired TiMetra, there haven’t been many more M&A deals than that.
I’m suggesting we take a page straight from Ford, GM and Chrysler and start offering zero-money-down financing to take these technologies off our hands while still keeping them on the road. Unless we – and our entrepreneurs – were utterly stupid and built a lot of technology that was simply wrong, it should be apparent that there are maybe 10 companies still out there with real technologies to offer the carriers. Rather than letting them go bust, rather than asking for our money back, rather than trying to mothball their “un-mothballable” IP, let’s license what they’ve built for zero cash down and earn a payout on the back end.
It may indeed sound crazy, but it’s no crazier than allowing far more than a $1 billion in cumulative telecom funding to go up in smoke.
We’re Giving it Away!
The concept is by no means scientific. It’s an idea – the preservation and sustainability of capital – that seeks to avoid creating the same technologies more than once in our lifetimes. Here’s how it might work. Say Comcast knows that it can use some type of broadband technology for its cable systems in the future, yet it’s simply unwilling to make the purchase at this time. This is partly because they themselves are under financial pressure and do not want to make un-accretive acquisitions and partly because they do not want to make a mistake buying bad technology from a pre-revenue startup. Thus, from a venture fund’s point of view, there is little chance Comcast (or the many buyers like it) will today pay decent value for the company to enable it to make sense.
Thus, instead of shutting down, having the engineers scatter and letting the tech development go to waste, why not give Comcast the technology for free in return for an earn-out in the back end? Maybe part of the deal is that Comcast gets an exclusive for the cable market and the company retains rights to the rest. Comcast thus covers the burn (cheap pre-built R&D) for supporting the technology in its market. It rolls it out and can even backward integrate it into its existing hardware.
What a weapon it has if the technology works! So much so that it can even then take it to Nortel or Lucent and sell it back to them or have them simply service the product. Investors and management teams get paid out on the back-end in terms of some measure of revenue the technology drives. Call it a risk-free option for the buyer and an exit alternative for the investors in situations where all too often there are none.
It may be a creative strategy. Perhaps crazy. But in conserving our own ecosystem of startups, it seems far better than letting what we’ve done go to waste. It’s about conservation of matter (read: cash) and energy (read: time).
Why not find some way to recycle innovation and turn it into someone else’s R&D? If we don’t, we’ll be building the same darned things all over again when the market is finally ready to adopt fully end-to-end IP optical networks. Granted, if we wait, the customers will be more receptive, they’ll have bigger budgets, there will be killer apps and a whole range of end-user devices sucking bandwidth off the network. But why spend the extra $60 million to reinvent the $120 million that’s already been spent in sunk costs?
As another private company CEO puts it: “We’re just trying to survive on nuts and berries out here until the market finally comes around.”
Rather than sit and wait – and wait – for that day, why not improve the odds of survival?
Ravi Chiruvolu, a general partner of Charter Venture Capital, is a regular technology columnist for VCJ. If you’d like to send him feedback or ideas, email him at email@example.com. Chiruvolu specializes in enterprise software, software infrastructure, e-business and wireless technologies. He sits on the boards of Ellie Mae, ManageStar, Niku (NASDAQ: NIKU), Quantum3D, Talaris, Verano and Winery Exchange.