Falling VC investment will hit innovation: Ovum

The continuing decline in venture capital (VC) investment in telecom startups could mean less innovation, says a new paper by Ovum.
The research firm says that while telecom vendors continue to spend around 13%–14% of revenue on R&D, VC funding of vendor startups has fallen steadily in the last few years.
VC telecom investment shrank from $1.82 billion for the four quarters ended 3Q08 to just $1.18 billion in the 2Q09–1Q10 period, Ovum principal analyst Matt Walker said.
He revealed Ovum’s research into investment by ten large vendors over the past three years found that VC funding for telecom startups had declined from 5.6% in 3Q08 to just over 4.0% in 1Q10.
“We believe this poses a substantial risk to carriers in the level of innovation they will be able to internalize by working with, acquiring, or even copying successful startups,” Walker said.
He said that while vendors were maintaining research spending for the moment, recent market consolidation and cost pressures big US and European vendors are cutting back staff and closing facilities.
“This may lead to lower R&D/revenues ratios in the future. More important is the trend we have already observed in venture capital, which typically funds the ‘game-changing’ ideas that big vendors often ignore”.
Walker says continued lower levels of R&D investment will mean slower introduction of new technologies and potentially less differentiation in product areas that feature innovative approaches.
It would also mean heavier reliance on the standards process instead of product innovation, “and an aversion to introduce anything proprietary, even when it is ‘better’.”
He noted that Chinese vendors Huawei and ZTE were below the industry average in spending 9%-10% of revenue on R&D, while Juniper, Nokia Siemens Networks and Ericsson were all well above average.
Walker believes that Chinese vendors have a strong incentive to exploit others’ weaknesses right now. “They are eager to earn their stripes as innovators and may be able to do so faster while western VCs and vendors are distracted”, he said.
“They may consider creating venture funds of their own, along the lines of what many large tech players have done, e.g. Intel, Microsoft, Motorola, and Google.”