redherring.com
CATCHING THE WAVE: The venture capital community is riding high on LMDS.
By Alex Gove
The Red Herring magazine
July 1998
Wall Street cast a jaundiced eye on March's Local Multipoint Distribution Service (LMDS) auctions held by the Federal Communications Commission, refusing to pony up huge amounts of money for companies that wanted to bid on spectrum.
Kevin Maroni of Spectrum Equity Investors says that one reason was the FCC's disastrous 1996 personal communications service (PCS) C-block auctions, which he calls "the wireless industry investors' Vietnam." Venture-funded companies like General Wireless and NextWave had planned initial public offerings to raise money to support their purchases of C-block spectrum, only to be rebuffed by Wall Street when they failed to meet the generous terms of the FCC's installment plan.
At the same time, telecom was in turmoil. AT&T was breaking in a new CEO; WorldCom had just announced that it would buy MCI; and the cable companies, which intend to be major players in transmitting data, were cash strapped and making deals with Bill Gates.
Popular demand
Enter WNP Communications, an Earlysville, Virginia, startup backed by an all-star syndicate that includes Columbia Capital, Madison Dearborn Partners, Spectrum Equity Investors, Alta Communications, Providence Equity Partners, Chase Capital Partners, Norwest Venture Capital, Advent International, Battery Ventures, New Enterprise Associates, AT&T Ventures, and a one-year-old Denver-based startup called Formus Communications. Sources close to the company say that WNP used the LMDS auctions to acquire more contiguous spectrum than any other wireless company in the United States, if not the world.
WNP will have to compete with WinStar Communications, Teligent, and Nextband Communications, but President Thomas Jones claims that WNP has more broadband capacity than any other company in 11 of the top 12 U.S. markets. WNP's footprint reportedly encompasses 114 million people and offers 1,100 MHz of capacity in most service areas. The licenses will be formally awarded later this summer. And the price WNP paid for all this spectrum? Just $186 million.
Why is this LMDS spectrum significant? Because it could help solve the problem of last-mile connectivity, or the connection between a telco's backbone and its end customer. Although high-profile companies like Qwest Communications have invested millions in a coast-to-coast fiber network, they do nothing to unclog the bottleneck that occurs between a local exchange carrier and a voice or data packet's ultimate destination. LMDS, which was developed by the military to provide secure wireless communications along short, fixed distances, addresses this problem by delivering 10 mbps to the desktop without requiring local carriers to dig up streets to lay fiber.
Andy Fillat of Advent believes that Wall Street failed to see the potential of this spectrum because LMDS's immediate business applications are not clear. Nevertheless, one WNP investor asserts that the sheer scale of WNP's spectrum will attract the attention of equipment vendors and allow it to become a meaningful broadband player.
Filling out formus
Formus's primary focus is to deliver broadband voice, video, and data service over LMDS to foreign countries. The startup has raised $58 million in two rounds of financing from Telecom Partners, Spectrum Equity, the Centennial Funds, Canadian Imperial Bank, M/C Partners, Chase Capital, and IAI Ventures. It raised the biggest venture round--$55 million--of any wireless company last year (see chart, below).
The opportunity abroad is immense. As Steve Schovee of Telecom Partners points out, the inferior infrastructure of many foreign countries means there are fewer alternatives for high-speed wire-line data networks than in the United States, and LMDS offers these countries a way to bypass expensive investment in copper and fiber. Although Bill Elsner of Telecom Partners, who is also Formus's chairman, concedes that the company probably will have to charge less than it could in the United States, the demand overseas is higher. The company has implemented service in Ecuador and will expand into Poland and New Zealand by the end of the year; plans for six to eight more countries are in the works. Mr. Schovee sees competition coming primarily from in-country business groups.
There also are LMDS opportunities here at home. Norwest, Foundation Capital, Institutional Venture Partners, and Matrix Partners just provided second-round funding of $12 million to WaveSpan, a Mountain View startup that has improved on the seemingly hopeless notion of wireless LANs. At the moment, if a company wants to expand its campus, connecting different LANs can be expensive and troublesome. WaveSpan's product, currently in beta testing, addresses this problem by using spread-spectrum radio technology to connect LANs in different buildings on a corporate campus.
Radio activity
Triton Network Systems could make LMDS even more appealing. Using technology licensed from Lockheed Martin, which developed it for the military, Triton has found a way to enable millimeter-wave radios to handle up to 2 watts. (Most of these radios support 50 to 100 milliwatts of power.) This increase in power will theoretically let telcos deliver large amounts of bandwidth over much longer distances more reliably than past wireless technologies allowed. According to Mr. Fillat, Triton will release a 38-GHz radio later this year, and Triton CEO Brian Andrew says the company's technology should also be able to scale to higher bandwidth (up to gigabit speeds) as well as employ different types of spectrum (like 28 GHz and 31 GHz, both of which are frequencies used by LMDS).
Triton has received $40 million in two rounds from Oak Investment Partners, Advent, Bessemer Venture Partners, Adams Capital, Worldview Technology Partners, Chase Capital, and TeleSoft Partners. It will be competing with public companies like Northern Telecom (NYSE: NT) and P-Com (Nasdaq: PCMS).
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HIGH WIRELESS ACTS
The wireless companies that received the most VC financing in a single round in 1997.
Company Capital raised ($M)
FORMUS COMMUNICATIONS 55.0
GLOBAL TELESYSTEMS 39.2
CONXUS COMMUNICATIONS 35.2
SBA COMMUNICATIONS 30.0
NETRO 27.0
DIRECTEL INTERNATIONAL 25.0
DITECH 25.0
UNISITE 20.0
AIRNET 19.4
METAWAVE 19.2
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Venture investors are hoping that the sale of LMDS spectrum as well as basic improvements in millimeter-wave radio technology finally will stimulate real demand for the kind of LMDS and millimeter-wave radio components developed by Endgate Technology. Endgate closed a fourth round of $14 million in March, bringing its total capital raised to $44 million from Oak, Morgenthaler Ventures, Greylock Management, Sigma Partners, the Walden Group, Hallador Venture Partners, Kinship Venture Management, Goldman Sachs, IAI, and Vertex Management.
Just as wireless service providers foresee a lucrative market abroad, David Spreng of IAI identifies a growing demand for companies that make inexpensive components for foreign suppliers. Outside of the LMDS space, IAI and Vanguard Venture Partners have invested $3.8 million in Fujent, a Santa Barbara, California, company that makes high-powered amplifiers for cellular, Code Division Multiple Access (CDMA), Time Division Multiple Access (TDMA), or Global Standard for Mobile Communications (GSM) service. These devices, called multicarrier amplifiers, help companies upgrade their existing infrastructures from analog cellular to digital or launch entirely new PCS networks. Currently, only Powerwave Technologies of Irvine, California, makes these amplifiers. According to Mr. Spreng, Fujent has developed a low-cost way to produce amplifiers that last significantly longer than Powerwave's products.
Another developer of low-cost devices is Zeus Communications Systems, which designs data telemetry equipment for the 2.4-GHz band that will let dumb devices like soda machines, automatic teller machines, and security monitoring equipment exchange short data messages with headquarters inexpensively. Last July IAI and Communications Ventures teamed up with two public companies, Digital Microwave (Nasdaq: DMIC) and Phoenix Technologies (Nasdaq: PTEC), for first-round financing of $4.6 million.
Promod Haque of Norwest is keenly interested in fabless chip companies that are making application-specific integrated circuits for wireless communications. Norwest's pony in this race is ComCore Semiconductor, which makes ASICs for high-speed LAN and WAN applications and is now concentrating on wireless applications. In December ComCore closed a second round of $9 million from Benchmark Capital; Brentwood Venture Capital; Forrest, Binkley & Brown; and Norwest.
Just as data is rapidly surpassing voice traffic over phone wires, Mr. Haque thinks data will eventually overtake voice traffic over wireless networks. The VC community is determined to lead the way. And with companies like WNP and Formus attracting such attention from VCs, can Wall Street be far behind? |
