Wozniak Startup Makes VCs Reconsider Consumer Wireless –

If you were a venture capitalist in 2000, consumer wireless was a red-hot market. But after some of the consumer wireless start-ups went up in flames, VCs quickly learned that sometimes even the seemingly best opportunities may be only smoke and mirrors.

The recent funding of Steve Wozniak’s consumer wireless venture, Wheels of Zeus (WoZ), raises an important question: Should VCs be rethinking consumer wireless? Venture Capital Journal spoke with a number of investors in the space and they say the watchword is still “caution.” Most agree that the market is still relatively immature. VCs are taking a wait-and-see attitude particularly with mobile devices – until they can get a better handle on just how the emerging companies in the space will fare against formidable would-be competitors like Verizon, Sprint and Sony.

Interest has piqued in 802.11, a wireless LAN technology commonly known as Wi-Fi. But its cost, coupled with uncertainty about how quickly the technology can be deployed in the consumer arena, remain unknown variables that will play a role in the success or failure of Wi-Fi investments.

Everyone we spoke with believes consumer wireless will be a huge market, but no one in the venture capital community has a clue as to when that will be. Many VCs figured the market would already be robust only to find that it is still somewhere in the future.

Other key questions VCs are wrestling with: Will the cost of consumer wireless prohibit it from reaching the very consumers it’s meant for? Will the infrastructure be in place to support it? Will consumers even care?

Given the soft economy and the fact that most consumer wireless companies must gain traction with large telecommunications carriers in order to successfully deliver their products, some industry observers are skeptical that venture-backed startups will be able to make serious inroads in consumer wireless devices.

Snake Pit

Matt Howard, a principal at Norwest Venture Partners in Seattle and a director of the Wireless Communications Alliance, is cautiously optimistic. His firm will take a close look at wireless deals this year. “We’re seeing in certain areas of wireless a lot of snake piles, but a lot of good things also,” he says. “We’re at release 1.0. For the next several years, you’re going to see a lot of innovation around wireless technologies, consumer devices and enterprise-class types of devices.”

Perry Wu, a venture partner with Palo Alto, Calif.-based ComVentures, is also bullish but proceeding with caution. ComVentures, which has been making wireless investments since 1974, is seeing less competition these days.

“We saw a lot of money chasing those deals in the past two years,” Wu says. “Wireless data had so much promise, like the Internet, but people didn’t know anything about carriers and made investments in the wireless space because they thought it was a green field opportunity. That led to a lot of tomb stones in the industry.”

One of the key reasons so many investors pulled out of wireless is that once they got burned they realized they didn’t have the necessary expertise to make “smart” investments, Wu adds.

For its part, ComVentures is bullish on 802.11, (a wireless LAN technology) wireless data services, and wireless infrastructure, the pipeline that will eventually enable consumer wireless technology to be accessible to nearly everyone.

“Infrastructure is just starting to get used by carriers and adopted,” Wu explains. “If you look at the lag times in the market, though, it will still be a bit of a ways out before you see consumer-type services driven out there.”

Where does (WoZ) fit into the equation? Some VCs believe Wozniak may be dabbling in the world of location-based services, a navigational technology based on global positioning systems (GPS) for the mobile wireless user.

The problem with current GPS technology is that it’s too expensive to put into most cars. It adds $1,500 to $2,000 to the price of a car, Norwest’s Howard says. For a Cadillac buyer, that’s no big deal. But if you’re in the market for a Hyundai, forget it.

“Now we’re starting to see people tuned into what the end user wants, and I believe the consumer wants location-based services,” Howard says. “There are a number of companies out there looking at location-based services as it relates to the consumer and as it relates to mobility, and WoZ may be stepping on the whole philosophy surrounding that. I’m not sure if WoZ is a chip deal, or a component or a system deal.”

His Lips are Sealed

Wozniak isn’t saying exactly what he’s up to, nor are his venture backers – Mobius Venture Capital (formerly Softbank Venture Capital), Draper Fisher Jurvetson and Palo Alto Investors, which have invested $6 million in his startup.

In a prepared statement, Wozniak said his new company “is designing new consumer electronics wireless products that will have universal appeal among consumers and corporations alike. Recent advances in global positioning software (GPS) systems and antenna technology coupled with the declining cost of processing power and two-way networking make the possibilities for new devices and services really exciting.”

If WoZ is developing devices, it faces major hurdles. The wireless industry is consolidated and it is dominated by a handful of enormous wireless carriers, just like the wireline industry, says Brion Applegate, a founder and managing partner with Spectrum Equity Investors in Menlo Park, Calif. Moreover, the players who dominate the wireline industry – the Verizons, BellSouths and SBCs of the world – are the same ones that have captured the lion’s share of the wireless arena. “In the world today there is a relatively limited number of potential customers,” Applegate says. “A number of competitive, alternative carriers, wireline and wireless, simply haven’t survived for a number of reasons. That’s reduced the class of players dominating the industry.”

Yet another barrier to entry for wireless consumer device companies is the ability of entrenched consumer device heavyweights – like Sony, NEC, Compaq, Ericsson and Nokia – to forge distribution partnerships and scale their manufacturing capabilities at a relatively low cost.

One wireless analyst says that distribution reach is not measured by relationships but by whether a carrier trusts the consumer wireless startup’s ability to deliver its technology on a reliable, scalable basis. “We’re seeing small evidence of traction there, but that’s still the unknown,” he says. “There have been a few groups funded in the last 12 months that have been small finds, but there is still limited traction.”

WoZ may face this conundrum down the road, as it plans to complete its first products sometime next year. Wozniak has said that WoZ isn’t planning to market its own products. Instead, the company intends to seek licensing and marketing agreements with other consumer electronics and related companies.

Maybe Wozniak’s fame will give WoZ a foot in the door to land must-have business partnerships. Or maybe market forces will just be too onerous to compel a major business partner from even answering the door when WoZ comes knocking.

Email Robyn Kurdek at