Are VCs Ready To Give Telcos A Boost?

Since the financial crisis, venture-capital (VC) firms have been giving much of their tech cash to mobile, social and over-the-top (OTT) start-ups, showing little interest in telecom. According to research firm Ovum, VC support for telecom infrastructure start-ups dropped from $796 million in 2009 to just $270 million in the 3Q11–2Q12 period. However, recent IPO and M&A transactions point to a rebound in VC interest in network infrastructure.

Notes Principal Analyst Matt Walker, “A funding disconnect has thereby emerged between network builders and network users. Lots of innovation and venture capital is targeting the network users, such as mobile apps and OTT platforms. However, little of it is directly helping the network builders. With a weak start-up pipeline, the industry relies more on incumbent vendors to generate new ideas and products. Their budgets are bigger, but VCs are often better at funding ‘game changing’ ideas ignored by established vendors.”

He adds, “Incumbent vendors’ internal R&D budgets are now nearly 90 times larger than VC investments in the telecom sector, up from 30 times two years ago. This narrows options for service providers, who rely on both large and small vendors for innovation. The big vendors also need access to the start-up pipeline, to fill in gaps in their own portfolios through partnership and M&A.”

In response, service providers are getting more actively involved in funding and working with start-ups. Telefonica, Vodafone, Verizon, AT&T, KDDI, China Mobile and many others are now funding start-ups directly, often deploying products in the network or lab ahead of commercial availability, Ovum says. Earlier this month, Deutsche Telekom was the latest carrier to announce a new push on the venture side, revamping its T-Venture unit to foster purchase of majority stakes and accelerated disbursement of funds.

“Carriers really need help from suppliers, yet what they face is a vendor market in confusion. Most large vendors are now shrinking and reorganizing, even the Chinese suppliers,” comments Walker. “Several vendors are modifying business plans and selling assets in order to stay solvent. With the recent VC drought in networking, it’s not surprising that big telcos have become more directly involved in funding start-ups.”

Walker points out that, based on data from the PWC/NVCA MoneyTree Report, the “Networking & Equipment” share of total VC investments shrank to just 1 percent for the past four quarters (3Q11–2Q12), down from about 10 percent in 2003. The good news is recent IPO and M&A deals do suggest VCs are smiling on the telecom sector again, when the term “telecom” is defined broadly. For instance, VC-funded start-up Nicira Networks recently was acquired by VMware for $1.26 billion.

“The tide seems to be shifting. With heightened investor interest and carrier need for solutions in such areas as small cells, network virtualization, and network optimization, telecom network infrastructure VC seems ripe for a rebound,” he concludes.