News flash: Telecom investment not dead, just undergoing a makeover

SAN FRANCISCO—After three years of plummeting values—and a big surge in the last two quarters—private and public investment in telecom is coming back. It just might not take the same form that everyone is used to.

Instead of seeing big vendor plays and large network build outs, most of the private equity and venture capital will be funneled into sub-system vendors and software, according to David Spreng, managing general partner with Crescendo Ventures. Speaking on a panel of investment executives from the public and private markets at RHK’s Startrax 2004 conference, Spreng said VC money is starting to flow back into the telecom market but is avoiding any vendor that requires sales to tier-one carriers, particularly in the U.S.

"You’ve seen a big shift from the VCs in interest in capital efficient models," Spreng said. "There are structural issues that make investing in system level companies not an attractive thing."

And though there are few small plays currently, the same philosophy is holding true in the public equity markets for operators, said Susan Kalla, senior analyst of technology and vice president for FBR Investment Services.

"It takes you maybe three years to build out a network and it takes you another two before you get any revenue out of it," Kalla said. "That whole process is like moving planets. It just takes a while."

The good news, despite the general investing public perception, is that carriers continue to experience 10% to 20% increases in bandwidth demand. At the same time, publicly traded equipment vendors have seen their valuations jump 153% over the last couple of quarters.

However, until price competition becomes a little intense, the entire industry will suffer in the area of public perception.

"If prices stabilize, the group can go from being very negative to the hottest thing on the planet," Kalla said.