The wireless bubble still has some air in it. With median valuations for wireless IPOs down 89% since January 1999 and public market wireless valuations down 43% in just the last 12 months, you’d think we would have seen the worst of it. But when it comes to the survival of all those well-funded wireless startups capitalized over the last four years, the weeding-out process still has a long way to go. I’d say the game is only half over.
This is not to say that a huge, albeit perhaps still undefined market opportunity doesn’t lie ahead for the 590 wireless communications companies funded since 1999. Indeed, too much money – more than $8.7 billion invested since 1999, according to Venture Economics (publisher of Venture Capital Journal)-has been put into wireless startups for at least a few intelligent and innovative solutions not to survive.
Yet, much like a shopping mall operator who requires an ecosystem of roads, cars, quality stores, quality products and the like in order to engender demand and make money, the wireless industry must take form in similar ways. Unlike other point-and-click VC homeruns, like eBay and Juniper Networks, venture-backed wireless startups have to do one of two things. One, they must get co-opted into the tight-knit incumbent community of established wireless players. Or, two, they must be able to prove their solutions so compelling and their customer return on investment (ROI) so obvious, that the industry decides it simply cannot live without their innovations and technologies. If not, incumbents-such as Nokia, with its 35% market share and proprietary technology-will decide they can create their own solutions. And they will.
Like most emerging technologies, wireless is experiencing the same growing pains most industries endure as they consolidate around a few industry leaders while still seeking unique sources of innovation. Yet, expectations by venture capitalists and entrepreneurs alike have resulted in some severe miscalculations. You’d think we would have learned from the Internet, but sometimes you’ve got to be knocked in the head twice. Here are three reasons why:
1. Most products that wireless companies offer are a “nice to have,” not a “must have.”
Applications for 802.11 are only now proving their stripes, if not their business plans, but they still have a long way to go. Other seemingly nifty applications, such as those for wireless photo sharing or instant messaging, are also only now gaining traction. The applications were too far ahead of the devices capable of using them. As a result, the question remains: Just how will niche wireless applications and technologies generate meaningful revenue for startups and meaningful ROI for investors? As one wireless startup executive says: “There are 25 wireless startups that I can name that are only marginally better in terms of technology differentiation than what’s already out there. You have to have stunning differentiation, and it can’t be based on cost. The big guys will always kill you on cost.”
2. For wireless to truly prove itself, a critical mass of technology must be in place, including full deployment and seamless networking of wireless infrastructure, devices, applications and service providers.
If any of those are missing or lag the rest, total adoption of any wireless innovation will be held back, and private companies seeking to deploy in this universe will suffer. Recent proof of this limitation comes in the form of Cometa Networks, a startup formed and funded by AT&T, IBM and Intel to provide wireless Internet access in the United States. Cometa is also backed by venture firms Apax Partners and 3i. It may be the only wireless startup that makes sense right now.
Could any VC imagine trying to do this alone with just three guys and a business plan? The sheer notion that such a company will provide wireless access for telecommunications companies, Internet service providers, cable operators and wireless carriers means it must show stability, staying power and technology capable of fitting into the current wireless network ecosystem. Rather than being a typical startup attempting to join a very tight coupling between vendors and carriers, Cometa leapt ahead of hundreds of startups by being at the center of that coupling.
3. There is a clear and ongoing lack of customer focus in the wireless area.
Just as the Internet was a transport mechanism that defined a method of distribution-rather than a sustainable industry in and of itself-wireless suffers from the same disease. Is it an industry or an innovation? Unless and until there is a high-ROI application delivered reliably and securely on a network providing sufficient access and performance to a device that is easy to use and worth adopting, I, as the customer, will have little interest in opening my wallet.
The point here is not that, for certain niche businesses, there isn’t growth ahead; surely there is. The point is that because the market has been so weighed down by “shelfware” and capital expenditure budgets have been slashed to the bone, carriers and enterprise customers are no longer willing to experiment on wireless innovation. Technology must solve a specific problem by addressing a specific point of pain in the enterprise.
Because the coupling between vendors like Nokia and Ericsson is so tight with carriers like AT&T and Verizon, it’s not only hard for startups to break in, it’s even harder for them to see the points of pain they need to address.
Put another way, for startups to survive, they need to positively influence three key metrics: average revenue per user (ARPU), gross cost per customer added (GCPA), and churn (how many customers are lost). “Anything that helps in these three vectors will be viewed positively,” says the wireless veteran I mentioned above. “Anything that doesn’t will not even be looked at.”
As a result, the landscape is littered with great, well-funded wireless technologies that never had a chance. ResoNext and nBand didn’t see their 802.11 dreams realized. Exio and Jetcel were acquired by Cisco, but then, for all intents and purposes, had their wireless projects killed. Even public companies, like Winstar Communications, have found themselves six feet under. More living dead will follow.
Obviously, not all wireless startups are doomed. Some, like Chelmsford, Mass.-based Airvana, which builds Radio Access Network (RAN) infrastructure based on the CDMA wireless standard and an all-IP architecture, have already landed some of the world’s largest CDMA operators and wireless infrastructure OEMs as customers. Although Airvana, backed by Matrix Partners and wireless CDMA giant Qualcomm among others, may not yet be a Juniper, neither is it a failure. “Wireless is a difficult environment, but there are substantial pockets of opportunity,” says Richard Wong, senior vice president of marketing for Openwave: “Will the behemoths like Nokia, Ericsson or Motorola be doing all the innovating? No way.”
Indeed, incumbents have far less experience in developing software and applications than some of their smaller counterparts. And, if venture-backed companies are solving specific problems-say, within the wireless LAN or in enterprise security-their odds for success increase exponentially.
But are these the big wins the venture community needs to salvage their internal rates of return? Not likely. The returns for today’s venture backed wireless startups will be more modest and the success stories far more selective than VCs and entrepreneurs ever thought possible.
Ravi Chiruvolu, a general partner of Charter Venture Capital, is a regular technology columnist for Venture Capital Journal. He specializes in enterprise software, software infrastructure, e-business and wireless technologies and sits on the boards of Ellie Mae, ManageStar, Quantum3D, Talaris, Verano, Winery Exchange and Xavient Technologies. Email him at