**4/99 RedHerring article (see bolded section on NTRO). For the long-termers like myself who feel fortunate to get a nice entry price for various reasons. I strongly believe in the Netro technology, business plan, management and huge market opportunity. djane
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NO STRINGS ATTACHED
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.
Endgate Technologies intends to duck this competition
by selling to both American Wireless and Netro.
Founded in 1991 to develop technology for
Teledesic, the company is shipping 38-GHz
transceivers and antennae to integrators like California
Microwave, P-Com, Alcatel, Harris, Digital
Microwave, and Innova. Last spring, Endgate closed
a third round of $14.25 million; it has raised a total of
$30 million from Oak Investment Partners,
Morgenthaler Ventures, Greylock Management,
Sigma Partners, the Walden Group, Hallador
Venture Partners, Kinship Venture
Management, and Goldman Sachs & Co. Oak's
Bandel Carano sums up his firm's involvement in
Endgate by saying simply, "We're big believers in the
28- and 38-GHz spectrum." He points out that 38
GHz allows IECs to build out their networks as they
acquire customers--a stark contrast with the wired
solutions of both the RBOCs and the cable
companies. (As an example, one VC cites the
possibility of a relationship between WinStar and
MCI, which has partnered with NextWave for
narrowband voice and data communications but does
not have a wireless broadband data alliance in place.)
As excited as Mr. Carano is about millimeter-wave
radio, however, he stresses that the PCS and cellular
markets are still very interesting from an investment
standpoint and sees a number of opportunities in
helping companies maximize the value of expensive
spectrum investments. One company that Oak has
invested in is Metawave Communications, a
Redmond startup that was founded in part based on
technology developed at American Wireless.
Metawave is making multibeam switched antenna
platforms that reduce the number of cell sites required
to provide coverage. Mr. Carano says that the
antennae, which work with analog, Code Division
Multiple Access, or Time Division Multiple Access
service, improve the capacity on a single cell site by as
much as 40 percent. He also claims that Metawave's
"smart antennae" enhance a network's call quality and
reduce its power requirements. The company, which
is just shipping product, closed a third round of $15
million in November 1996; investors include Oak;
Venrock Associates; Sevin Rosen Funds;
Worldview Technology Partners; Integral Capital
Partners; Deutsche Morgan Grenfell; Montgomery
Securities; Robertson Stephens; and Wessels,
Arnold & Henderson. To date, Metawave has
raised $30 million in capital.
Complements go a long way
Another company backed by Oak is Repeater
Technologies of Sunnyvale, formerly Peninsula
Wireless Communications, which makes cellular and
PCS repeaters. The company raised $9 million in
January from Oak, Bay Partners, Brentwood
Associates, Hallador, HMS Capital Partners, and
Nazem & Co. According to Mr. Carano, Repeater's
monthly sales exceed $1 million. "Repeaters are
absolutely a key to reducing the cost of PCS
deployment," he says. Huge equipment companies like
Lucent, Ericsson, and Motorola are offering operators
elaborate base stations at financing rates as high as
100 percent; repeaters allow operators to get up and
running at a lower cost, especially since securing
suitable cell sites is becoming an increasingly political
issue. Still, Mr. Carano stresses that Repeater's
offering is complementary to the base stations that the
big boys are pushing. "You've got to be
complementary," he says. "It's the equivalent of
starting a software company that's right in the
headlights of Microsoft. There are several Microsofts
in the wireless business, and you've got to have a
strategy that avoids them."
Don Parsons of the Centennial Funds agrees with
Mr. Carano and wonders whether the venture world
may be getting ahead of itself. Although he
acknowledges that VCs frequently focus on the latest
and greatest technologies, he cannot understand why
PCS is "all of a sudden a has-been" to some of his
colleagues. Centennial is funding a startup called Big
Pipe to bid for 28-GHz spectrum in the coming
auctions, but it is focusing its energy on developing
hardware and software to enable existing wireless
markets. "It's a case of where all the hype is versus
where the business is actually getting done," Mr.
Parsons says. One example of Centennial's practical
approach is Castle Tower, a Houston firm that owns
and manages communications tower sites in the United
States and abroad. Since each tower site can support
PCS, cellular, and paging operators, Castle Tower
receives income from several sources. Also, since
municipalities do not want any more towers, each site
that Castle Tower owns is becoming more valuable.
The firm is the preferred bidder for the British
Broadcasting Corporation's entire wireless
infrastructure and is putting the final touches on a $60
million fourth round from Centennial, Berkshire
Partners, Nassau Capital, and PNC Equity
Management.
SMaRt move
Perhaps the best illustration of Mr. Parsons's wireless
philosophy is SMR Direct. The Denver company is
offering analog SMR service in Latin America and the
United States. Although SMR Direct faces limited
competition in Latin America because of the poor
telecommunications infrastructure there, the play in the
United States is to undercut Nextel
Communications, which controls roughly half the 2
million-customer SMR market. Companies use SMR
radios primarily to keep in touch with employees in the
field. Nevertheless, Nextel is trying to upgrade its
blue-collar clientele to digital SMR, which will allow
the company to load more customers onto each
channel. Digital SMR costs about $700 per radio plus
per-minute charges, a big expense for a small
business. By contrast, SMR Direct doesn't charge for
its radio and offers users unlimited airtime for $19.95
per month. Taking into account the 12 million users of
two-way radios, SMR Direct believes it can build a
sizable business from an otherwise overlooked
market. So far, the company has raised $33 million in
three rounds from Centennial, Crest International,
Bank Boston Ventures, Boulder Ventures, and
Trailhead Ventures.
While sectors like millimeter-wave radio may be
overhyped, so much activity across so many areas is a
good sign. These deals show that despite the risks,
VCs are bullish on a world without wires.
COPYRIGHT ¸ 1998 RED HERRING COMMUNICATIONS. |
