The money is out there … for some

Although the economy may be stalled, innovation continues. One of the big misconceptions about venture-capital investment is that people think it stops when the economy is bad, said Michael Rolnick, who leads wireless investments for ComVentures (www.comven.com), a venture-capital firm.

“We have to be counter-cyclical,” Rolnick said. “Nothing has changed about technology, and nothing has changed about people coming up with good ideas right now.”

What has changed, however, is the people who are buying those good ideas. Yet if you start investing when people start buying again, you’re always going to be too late to have the products needed to service those people, Rolnick pointed out.

The big question in the wireless industry today is how carriers will make money on 3G spectrum, especially those carriers that have already purchased spectrum.

“To some degree, no one has figured out the best and highest use of this new spectrum,” Rolnick said. People currently view the phone as a voice device; the industry has to get them to view it as a voice and data device, he said.

“There will be this spectrum, and stuff will be riding on this spectrum, and it will be going to devices,” Rolnick said, with the devices ranging from phones with data features to data devices with voice applications to separate devices for voice and data with people choosing one or both to carry.

Carriers bought spectrum and had business plans to do data services before the infrastructure was in place, he said, But with a typical wireless carrier, people aren’t 100% satisfied with the voice quality right now, so the infrastructure needs to be boosted to handle the voice, much less the data.

“If you think the current voice is bad, data has to be three to five times worse,” he said.

Financial commitments will be made to activity for the new spectrum when spectrum and infrastructure buildout is cheap enough to provide a return on investment.

Rolnick uses a BlackBerry (www.blackberry.net) device running on a Mobitex network and believes wireless access to e-mail is a killer app. He no longer carries a laptop, because he used it primarily to get his e-mail.

“The fact is you don’t need this snazzy, expensive spectrum to do it,” he said. “You can overlay it on a paging network, for the most part.” However he believes the Mobitex network will get overloaded because it wasn’t built for the volume of data resulting from long e-mails.

Rolnick speculates that all the wireless carriers were aware of what RIM (www.rim.net) was doing with BlackBerry and probably had discussions with RIM about running the service on their networks.

“If they knew how successful it was going to be today, they all would have wanted it,” he said. (VoiceStream (www.voicestream.com) reportedly is planning to introduce the RIM BlackBerry in 1Q 2002.) Rolnick noted that his cell-phone plan goes down in cost every year, The idea is that ideally he will talk more and the bill will stay the same, “but that paradigm can’t last forever.”

Wireless carriers have to figure out a way to remain a high-growth business, because they have to pay for their infrastructure, present and future. They can’t become like wireline, which is a low-growth business. Therefore, there’s no choice but to make data services work, he said.

“When people see rational plans, they’ll fund those rational plans,” Rolnick said.

He added that waiting for wireless data is “like waiting for Godot.” It’s never going to come in full force; it’s not going to jump from 40% to 70% in one year. It’s going to creep. But one day, he predicts, you’ll find out that 80% of people who use wireless phones subscribe to data services, “and you’re going to say, ‘Wow.’” As far as equipment manufacturers are concerned, his company is looking at companies that are improving the networks in terms of signal quality and strength.

“A lot of them are better, cheaper, faster,” he said. It’s expensive to build a base station, but if a base station were half the cost, you might employ two base stations in a geographic area to give everyone better coverage and service, Rolnick said.

ComVentures invests in start-up companies. It counts on only one out of four companies it funds to be a winner. Rolnick explained: “I plan on one to go out of business, one to be sold for the same price I paid, making it someone’s else’s problem, one to be a moderate performer and one to be a successful performer.”

The difference in today’s economy is a longer timeline to success. How quickly companies will become stars has gone from a 3-year horizon to a 5-year horizon, Rolnick said.

He said if you invested in Microsoft (www.microsoft.com), Oracle (www.oracle.com) and Cisco (www.cisco.com) in 1990, all three were trading for under $1 a share and probably spent the first five years with the stock under $10.

“They were alive in 1990 when the market sucked, alive in 1993 when the market sucked, came alive in 1995 when the market was picking up and then took off in a bull market,” he said.

“Good companies with good business models can survive downturns,” he added. Companies that go bankrupt had flaws in their business models. A company that does $100 million on 70% margins should also be a solid company on $20 million.

“You may hack away a lot of bodies to get the cost structure under control, but if you have the right product, and it sells, and you are selling it for a lot more than it cost you to make it, that’s a good value proposition,” he said.

ComVentures studies the market and understands its dynamics. It doesn’t take a problem and go out looking for people to solve it. “We’re looking for people to walk in our door and tell us stories about how they’re going to fix something that’s screwed up, and then we, as astute students of the market can say, ‘Yeah, I get it. I think it’ll work,’” Rolnick said.