Subject: [NEXTEL-1] Wireless Funding Evolves Into A More Refined Exercise

From: [email-masked]
Date: Sat, 12 Jul 2003 05:29:31 -0400

Wireless Funding Evolves Into A More Refined Exercise

Jul 02, 2003

Investing in wireless startups no longer is an exercise in throwing money at wide
targets, although it is one for which plenty of capital still is available.
Venture
capital firms are looking to the wireless space more than ever, and they're also
looking deeper into the companies they hope will have the next must-have wireless
service or technology.

From an extensive look at the status of equity financing and other funding
activity
in the wireless space, Wireless Data News determined that venture capital
players' investment strategies mirror the evolution of wireless services.
Certainly,
just as service providers are migrating their networks to next-generation
technologies, investors are migrating their strategies to look for startups and
other
companies developing or already offering integral pieces of the next-generation
wireless world.

What appeared to have been a slowdown in capital available for mobile or fixed
services, for broadband or narrow-band technologies or for hardware or for
software
pieces turns out to be a shift in basic investing strategies. "Wireless is still a

fundamental phenomenon, so people are still investing," says Rajeev Chand,
senior analyst for venture capital research firm Rutberg & Co.

Companies focused on wireless data products and services represent
opportunities with particular resonance for some funding sources, now more than
ever because what wireless data will provide and what it won't are becoming clear
to the industry and to customers.

"Wireless is always going to be different medium because of the constrained
nature of the device, computing power and processing power," says Neeraj
Bharadwaj, a partner in the Apax Partners VC operation. "The fact that you're on a

wireless network means that the RF is always going to be inferior to what you can
get on a landline. The fact that people were thinking about this as being the
wireless Internet was very flawed in the early 2000 timeframe."

Investments premised on wireless Web access competing with wireline services
generally have had poor success rates. The key, Bharadwaj tells WDN, is
"wireless data investment that leverages the unique aspects of mobility." For
Apax, those aspects translate into "companies that leverage presence, location,
messaging and entertainment because we believe that those would be the
distinctive attributes about mobility," he adds.

Apax also looks for companies that realize cooperation with incumbents is
necessary, but not at the expense of not competing with them. "You've to be more
cognizant and knowledgeable about what the incumbents are doing in this space,"
Apax's Bharadwaj says. "You do have big behemoths, so you have to be very
thoughtful about how what you're doing is going to be either synergistic or
competitive, and what your plan is for dealing with those incumbent players.

"If you go to a wireless carrier, they don't want to deal with a 10-person
company,"
he adds. "They'd want you to go deal with Motorola and then together you could
sell the solution."

Apax's investments in mobile gaming developer and aggregator Jamdat, (WDN,
Aug. 28, 2002), location-based services vendor Webraska (WDN, Oct. 10, 2001)
and messaging and content provider Upoc (WDN, Jan. 17, 2001) reflect that
strategy. In addition, Apax has joined 3I in investing in Sonim.

Apax, founded in 1977 in the United States, with $19.8 billion under management
or advice worldwide and more than 330 companies in its portfolio, also is watching

activity in the development of backend components to manage information on
mobile devices. "The management of smartphones and of PDAs is increasingly
complex because these device are becoming smarter and frequently have a lot
more sensitive information," Bharadwaj says.

Radiofrequency identification technology for inventory and supply-chain
management also is attracting Apax's attention. "That has a very clear ROI
savings and a very clear ROI metric people can look at," he says. "We're looking
at this space. It's one of the areas that we'll invest in moving forward."

Too Much Money For Wi-FI?

Such is the level of funding for companies competing in the Wi-Fi sector of
wireless local-area-network services--more than $1.6 billion worldwide--it would
be
easier to determine which investors haven't made Wi-Fi bets than those that have.
Wi-Fi investors probably aren't throwing their money away, though, because
competition among service providers as well as among technology vendors
continues to escalate.

"It is clearly an over-funded space," Chand tells WDN. "The interesting thing is,
it's
not a monolithic category."

The space's first VC target were such semiconductor developers as Atheros
Networks (WDN, June 18) and Icefyre Semiconductor, focusing on offering
products for Wi-Fi access points or devices. The chip sector itself has offered
investors a multi-layered approach: The three 802.11 flavors--first b, then a and
now g--give investors more opportunities for pieces of the action.

The next Wi-Fi funding target became companies developing platforms for
managing access to Wi-Fi-enabled systems. Bluesocket (WDN, May 22, 2002),
Pronto Networks and Vernier Networks (WDN, Jan. 15) have drawn strong VC
support in this sector.

The third Wi-Fi front to gain support has been systems technology developers --
companies like Aruba Networks, Trapeze Networks and Vivato (WDN, Feb. 26)
that want to extend the reach of Wi-Fi access points.

Even the potential for new Wi-Fi products to create demand, though, isn't enough
to convince some VC firms to back companies in the space. "I think you're going
to see companies just flat out going out of business," says Bruce Sachs, general
partner with Boston- based Charles River Ventures.

Charles River was started 32 years ago and has invested in wireless for two years.

Its active wireless ventures include Celerica, which uses fiber-optic technology
to
help wireless carriers improve coverage in busy areas without deploying additional

cell sites; mobile content access enabler Chaotica; mobile broadband
infrastructure developer Flarion; wireless positioning technology vendor Rosum;
ultra-wideband technology developer Staccato; and media gateway and service
provisioning platform provider WaterCove Networks.

Sachs tells WDN applications that generate revenue for service providers are what
interests Charles River, and not more of the same equipment that carriers already
have. "I did some infrastructure stuff, and I think those companies are in good
shape, but I don't know if I'd do another infrastructure investment today," he
says.
"You've got major network equipment suppliers that are really struggling and are
doing anything to get marketshare."

Crunch Time Coming For Some

Whether startup Wi-Fi chip-technology developers will succeed largely has been
determined, but the next year to 18 months will determine the fate of most Wi-Fi
management and systems players. "When are mainline businesses going to put
802.11 into their offices?" Chand asks. "That's a gigantic market that hasn't
happened yet."

This period is crucial because if Wi-Fi deployments are implemented promptly by
service providers and enterprise users, then Wi-Fi management and systems
startups will likely be their technology providers. However, if the target market
delays large-scale Wi-Fi deployments, then such incumbent technology vendors
as Cisco Systems [Nasdaq: CSCO] and 3Com [Nasdaq: COMS] will have time to
develop similar products, and they likely will capitalize on their existing
relationships with companies in the target market.

If Wi-Fi deployments that need the latest management and systems technology
begin by mid- to late 2004, as many industry observers expect, startups should
prosper. For several, increasing demand for their products will prompt incumbents
to make bids to acquire them. "They'll have to get the product, but they also have

to get the revenues," Chand observes.

A Wi-Fi operation that transcends multiple sectors of the space--Cometa
Networks (WDN, Dec. 19, 2002)--attracted significant VC backing as well as
participation by high-tech and telecom stalwarts AT&T [NYSE: AT], IBM [NYSE:
IBM] and Intel [Nasdaq: INTC]. Apax and Cometa's second VC backer, 3I, expect
Cometa to have the right approach to building and selling service on a nationwide
network of Wi-Fi hotspots.

"The hotspot networks have not yet delivered significant revenues, but we do think

it will become a major industry eventually," 3I Senior Associate Paul Longhenry
tells WDN. "So we made a bet there."

3I, started in London in 1945 and investing in the wireless space for more than 10

years, has earmarked an average of $7 million to $8 million in roughly 45 wireless

industry startups. It has made companies offering wireless entertainment and
messaging services or technologies the focus of its attention. Interactive
messaging and mobile payment processing vendor MobileWay, IP-based
push-to-talk technology developer Sonim (WDN, March 26) and local/wide area
network roaming capability provider Kineto Wireless are recent 3I funding targets.

Thinking ahead is one of the attributes for which Longhenry and his associates
look in companies seeking funding -- that, and considering the needs and
preferences of all the parties they must work with to succeed.

"One of the things that are most concerning when you see a new opportunity is
that companies are underestimating the changes associated with satisfying the
multiple constituents in the value chain," he explains. Those generally include
service providers, infrastructure vendors, chipmakers and software developers.
"You've really got four different constituencies through the value chain, and you
have to make sense to each of those four," Longhenry adds. "Just because you've
got something that makes sense to a carrier, it does not necessarily mean you
can go directly to a carriers with that solution. Increasingly, they're going to
say go
partner with one of [their incumbent equipment providers] and then they'll talk."

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