VC's Pony Up

Equity finance still plentiful for select telecom plays

Despite the current dark days on Wall Street for tech stocks, venture capitalists see bright spots in the telecom field. Gone are the days of the high-flying business plans that won’t start producing revenue for years. Instead, down-to-earth is back in style — especially for down-to-earth plays in the wireless, content and optical network areas.

Darrell Williams, CIO of Telecom Development Fund (TDF) says, “Due to the fallout of e-commerce and dot-com business models that have required the customer to do something radically different, there is an increasing focus on tried-and-true business models.” He cites caller ID as an example of a technology with a viable revenue model.

“The customer is used to paying for value-added service, and the telco is used to adding it to an existing infrastructure,” he adds. “If a business plan slid into that revenue model, that would be something we’d be interested in.”

According to Williams, TDF is keen on opportunities in wireless service enhancements. But the fund brings a healthy dose of skepticism and models that reflect a “faster path to profitability that is understandable and intuitively reasonable.”

As a result, Williams believes such things providing streaming video over Web-enabled phones might be a little too bleeding edge.

“I’m less interested in the streaming of the video itself than the infrastructure that enables that to happen. You may not subscribe to a company that streams, but the company definitely has to buy the infrastructure in case customers say ‘yes.’”

In general, TDF searches for pieces of the wireless value chain between the application and devices that render it to end-users. For example, along with Ark Capital Management, the fund just finished an early-stage deal with wireless software developer Synovial, which promises to deliver a flexible middleware solution. TDF also partnered with Murphree Ventures on its most recent $2 million seed-funding deal with Elisar Software, which just released MediaRights, a product that protects against illegal e-distribution of content.

Williams likes wireless middleware because of its role in passing information through the different digital transmission protocols and rendering it on different operating systems, and he’s not the only one.

Likewise, Mohanjit Jolly, Garage.com’s director of entrepreneur development, says the firm is interested in technologies that allow high-bandwidth streaming and compression for wireless applications. He also adds wireless LANs to the list of hot sectors.

Joining the wireless bandwagon are Goldman Sachs and BMC Software, which recently established a $500 million fund with Nokia Venture Partners to invest in cutting-edge wireless and mobile Internet startups. In addition to backing American and European companies, the fund will also focus on Israel and the Asia Pacific region.

In the long term, content is also an area George Middlemas, managing partner of Apex Venture Capital, believes will be an up-and-comer. “Everyone thinks the Time Warner/AOL merger was done to increase network capacity. I don’t buy that. It was done to get more content. AOL wants to be the content-king.”

Middlemas also likes carrier-class switches because improvements in switching technology lead to newer and cheaper services for users. He’s particularly interested in optical-switch companies that integrate voice and data over the same networks, and Apex has backed those sentiments with investments in Nayna Networks, an optical-networking company.

Jolly also is strong on optical plays, but warns against focusing exclusively on the U.S.-only space.

“Growth is going to come in Asia, Latin America and India,” he says.

Regarding fears about over-capacity in optical networks, Middlemas for one isn’t worried.

“Sure there’s overcapacity,” he says, “but it won’t last long because soon there will be enough traffic to fill it.” He points to secondary markets and homes that still haven’t been wired, but will soon be clamoring for it.

Downturn Deepens
The pain continued in December for competitive DSL service providers. In the wake of staff-reduction announcements by Covad and New Edge, DSL companies NorthPoint, HarvardNet and DSL.net announced major job cuts.

NorthPoint said it would reduce its full-time workforce by 19 percent, cutting nearly 250 jobs in all levels of the organization. NorthPoint CEO Liz Fetter attributed the move to several factors, most notably Verizon’s cold feet in the NorthPoint acquisition.

At the same time, HarvardNet said it would exit the DSL business to focus on Web hosting and managed services. The restructuring entails reducing its workforce by about 58 percent, or 280 employees.

DSL.net said it would lay off 141 employees, or about 28 percent of its workforce, in an effort to reduce costs by about $8 million and extend the life span of its current capital.

New Edge Picks Up GST Slack
New Edge Networks will offer broadband service to more than 300 GST Telecommunications business customers whose service will not be continued by Time Warner Telecom. Time Warner won court approval to purchase GST’s assets in bankruptcy proceedings, but will not continue selling or supporting frame-relay services. According to Keith Rinne, president of the WAN services group at New Edge Networks, “GST and New Edge Networks will work closely to seamlessly transition existing service so customers avoid any service disruptions or the need to find a new service provider before service is discontinued.” D-day for GST customers is Jan. 10, 2001.

Eureka, Gillette Team Up
In an all-stock strategic merger managed by Spectrum Equity (value undisclosed), Eureka Broadband and Gillette Global Network merged to become broadband services provider Eureka GGN. Scott Ellison, Spectrum’s principal, says the deal was done “with the full support of both management teams and both boards due to the complementary nature of their production sets and geographic coverage areas.” He projects the new company will have a $20 million annual run rate.

BT Bites Bullet in Bond Market
In the largest dollar-denominated corporate bond deal ever, British Telecommunications Plc sold $10 billion in bonds to pay down debt, which was largely incurred buying 3G wireless licenses in Europe. Due to a variety of negative perceptions about BT’s market position, the telecom industry in general and the timing of the sale, BT was forced to pay a hefty premium for the funds. Most of the $10 billion offering will pay more than 200 basis points over Treasuries.

The offering, managed by Merill Lynch, Morgan Stanley Dean Witter and Salomon Smith Barney, is a combination of three to 30-year bonds. BT’s overall debt could surpass $30 billion by the end of the first quarter.

China Rolls Ahead
A number of three recent deals indicate how major players are positioning to compete when China joins the World Trade Organization (at which point, import duties on telecom equipment in China will drop from 35 percent to 5 percent).

For example, China Railway Telecom, spun off from the Ministry of Railways, is the latest company to be granted a telco license in China. That brings to six the total of domestic telcos that foreign competitors will contend with. Jumping into the game, AT&T recently entered a joint venture with Shanghai Symphony Telecom. AT&T acquired a 25 percent stake in the broadband service provider.

Meanwhile, China Telecom, the fixed-line and data-transmission company, plans to join China Mobile and China Unicom in going public in a $6 billion to $7 billion deal. China Telecom is also seeking a cellular license so it can compete as an integrated service provider.

C&W jumps into Japan
Cable & Wireless announced a five-year, $1.4 billion investment to create an optical-fiber network throughout Japan that will connect 80 cities and offer links to all major businesses. When completed, the deal will be the largest investment by a British company in the Japanese telecom industry. The new company is called Cable & Wireless IDC.