VCs disinterested in telecom, keen on cloud

VC spending with telecom service providers and hardware vendors plunged to $220 million in Q3, half the 3Q09 level, spread across just 22 deals.
VC spending on just the vendors was down 47% to $192 million. Innovation from hardware start-ups is central to telecom’s progress, so this trend is disconcerting.
The third quarter data shows that VCs are eagerly funding services and software-centric ventures in areas closely related to telecom.
Hot areas include the cloud – such as online storage, file transfer, smart computing, data virtualization, WAN optimization – and mobile applications. Nonetheless, telecom hardware-centric start-ups need more support.
The recent decline in VC spending on telecom has coincided with the financial downturn, but the GFC can’t be blamed entirely: investment in other tech segments hasn’t fallen as badly, and some sectors have even seen growth. There is no lack of exits for successful vendors: the IPO market has improved, and vendor M&A activity is ongoing.
The decline in telecom hardware investment has come at the same time, though, as the big Chinese vendors Huawei and ZTE have really made a splash on the world stage. Since these vendors were once positioned as ”me-too’’ suppliers of cheap hardware, their rise to the top of global rankings has increased fears of commoditization.
Competing vendors have repositioned their portfolios around applications and services, de-emphasizing networks and hardware. Likewise, VCs have steered resources towards start-ups positioned to play in telecom through software/applications and services.
This means that hardware-centric innovation may come increasingly from the big established vendors, while start-ups will play much more to the “new” side of telecom: services and software applications.
In 3Q10, the software and services segments attracted significantly more VC dollars than a year ago, up 60% and 15% respectively. Meanwhile, 3Q10 investments in telecom vendor start-ups were down 47% over the same period.
This does not mean that venture firms are ignoring telecom, but their interest has morphed away from “boxes” (hardware) and towards businesses built on software/application and services expertise.
The telecom-related tech start-ups now attracting venture financing are involved in online video and content delivery networks (CDNs); network optimization and wide-area network (WAN) acceleration; smart grid/energy efficiency; data centers and storage; and technologies that somehow tie into the ”cloud.”
Since “cloud” is becoming an all-purpose buzzword for high-capacity, distributed IP wide-area networks, many ventures can be positioned as enabling or leveraging the cloud. To stretch the point a bit: social networking is another hot segment, and while we would certainly not call it “telecom,” without the telecom infrastructure underlying the cloud – the value of social networking would quickly go to zero.
Users are putting enormous pressure on telecom networks across the globe – fixed and mobile, terrestrial and undersea. Business ventures and social networks require a high-performing, reliable physical telecom network (a cloud) to function.
Many of the best ideas for improving the capacity and efficiency of telecom networks come from outside the confines of big corporate R&D departments. Hence there is a need to refresh the flow of VC funding into telecom vendor start-ups, especially the hardware players – from chips to systems.
During the quarter, Juniper and ZTE separately launched their own small VC funds of about $5 billion each. Like many larger tech firms before them (Cisco, Motorola, Google, Intel, etc.), Juniper and ZTE aim to fund complementary innovation. Given the dearth of cash available for hardware-centric telecom start-ups lately, let’s hope that others follow.

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