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Despite the considerable
risk and expense, VCs are
bullish on wireless
communications.
By Alex Gove
The Red Herring magazine
April 1997
Investing in wireless
communications is not for the
faint of heart. Although the
majority of venture capitalists we
spoke with argued that the high
cost of installing fiber-optic
wires will result in increased
demand for wireless alternatives,
the money required to start new
wireless ventures exceeds that of
almost every other area of
venture capital investment.
Aside from the technical
challenges, which cross many
disciplines, startups must
carefully track the movements of
a number of telco and wireless
behemoths. And then there is the
Federal Communications
Commission, a government body
whose regulatory actions can
undermine entire companies with
the stroke of a pen.
As challenging as the wireless
industry is, however, a number
of venture capital firms are
willing to play this high-tech
game of chicken. One reason is
the size of the wireless local-loop
market: the worldwide market
will reach 60 million lines by the
year 2000, according to the
Washington, D.C., research firm
MTA-EMCI. (For a look at the
wireless local-loop market in
developing countries, see
"Closing the Gap.") In the United
States, wireless technologies are
offering interexchange carriers
(IECs) like American Telephone
& Telegraph, Microwave
Communications Inc. (MCI), and
Sprint an opportunity to compete
head-on with the regional Bell
operating companies (RBOCs)
for control of the lucrative local
loop. This is particularly true in
the data transport arena, where
advances in millimeter-wave
radio hardware give startups a
chance to sell into a very big
market.
Still, the number of venture plays
in the wireless world is growing
exponentially. Judging from the
activity in millimeter-wave radio
as well as personal
communications services (PCS),
cellular, and even specialized
mobile radio (SMR)
technologies, the message from
the VC community is clear:
wired truly is tired.
These days, data transport over
38 GHz is all the rage. True,
proponents of 28 GHz (Local
Multipoint Distribution Service,
or LMDS) are considering using
that frequency instead of
"wireless cable" for data
transport in light of the planned
FCC auctions of a whopping 1.3
GHz of spectrum later this year.
(See "What's the Frequency,
Kenneth?" on page 86 for more
on the auctions.) But 38 GHz is
already being used for data
transport as well as for voice and
video. Besides the "first-mover"
advantage of 38 GHz, Andy
Fillat of Advent International
is impressed with its directivity.
Although all millimeter-wave
radio frequencies require a clear
line of sight between stations, 38
GHz is so high on the frequency
scale that two beams can be
pointed in only slightly different
directions with minimal
interference. Since 38-GHz
spectrum can be reused anywhere
from 5,000 to 500,000 times,
Mr. Fillat believes 38 GHz is a
more flexible local-loop
alternative than 28 GHz or 18
GHz.
Advent is betting on data
transport over millimeter-wave
radio in three ways. First, the
firm was one of two venture
investors in Advanced Radio
Telecom (Nasdaq: ARTT), an
early-stage public company that
currently owns the lion's share of
38-GHz spectrum along with
WinStar Communications
and Biztel Communications.
(Ameritech Ventures was
also an investor.) In addition,
Advent joined Bessemer
Ventures; Weiss, Peck &
Greer; Norwest Venture
Capital; Burr, Egan,
Deleage & Co.; JH Whitney
& Co.; and Ameritech in
investing in P-Com (Nasdaq:
PCMS), which primarily focuses
on the cellular voice-backhaul
market but is increasingly
developing equipment for
38-GHz data transport. Advent's
most recent bet is on American
Wireless, a Seattle startup
founded last December to build
"third generation"
millimeter-wave radios and
systems for broadband wireless
local-loop carriers. The firm,
which raised a $7 million first
round from Advent, Crosspoint
Venture Partners, Alta
Partners, and ITV, plans on
releasing product later this year.
Taking it to the Netro
American Wireless is keeping a
low profile, but Mr. Fillat
acknowledges that the market for
38-GHz data transport equipment
has already become competitive.
One rival could be Netro, a
three-year-old Santa Clara firm
in the process of closing a third
round of $15 million. (To date,
the company has raised more
than $30 million from AT&T;
Brentwood Associates;
Norwest Venture Capital; Cisco
Systems; US Venture
Partners; Citibank;
Vebacom GmbH;
Robertson, Stephens & Co.;
and Deutsche Morgan
Grenfell.) Netro is currently
focused on the European market
because the European Economic
Community has mandated the
deregulation of the local loop in
Western Europe by January
1998. Since August of last year,
Netro has been delivering
equipment that allows
Asynchronous Transfer Mode
and frame relay service over 38
GHz. One customer is Vebacom,
which hopes to compete with
Deutsche Telekom without
paying for leased lines; at the
same time, Netro also hopes to
sell Deutsche Telekom
equipment that will allow it to
expand its coverage.
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