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Bad news for network innovation: Investment in infrastructure startups is falling

Posted in Uncategorized, tagged , , , , , , , , , , , , , , , , , , , , , , , , , on October 24, 2012| Leave a Comment »

While we often think of small nimble startups as the true innovators in technology, that hasn’t necessarily been the case in network infrastructure for the last few years. A study of venture capital funding from Ovum shows that while overall tech investment has recovered since the dark days of the recession, the vast majority of that spending went to services and applications startups like Facebook, Twitter, WhatsApp and Spotify.

Meanwhile, the startup companies that make the gear over which those services traverse have seen investment fall from $796 million in 2009 annually to just $270 million in the 12 months ending in June, Ovum found. According to Ovum principal analyst Matt Walker:

“A funding disconnect has thereby emerged between network builders and network users. Lots of innovation and venture capital is targeting the network users, such as mobile apps and OTT platforms. However, little of it is directly helping the network builders. With a weak start-up pipeline, the industry relies more on incumbent vendors to generate new ideas and products. Their budgets are bigger, but VCs are often better at funding ‘game changing’ ideas ignored by established vendors.”

Admittedly, investing in the next big social network or an app that could generate millions of downloads is a lot sexier than, say, envelope tracking technology or cell site radio frequency filters. But those infrastructure innovations are just as important. The capabilities of many apps and services have already far exceeded the ability of our mobile networks to deliver those apps and services at a reasonable cost (think Netflix on 4G tablet). If we let network innovation slip, we could wind up with a bunch of very powerful services that have nowhere to go.

As Walker points out, the onus for innovation thus falls on the big established telecom vendors, and it’s quite the burden. Ovum estimates that with the falloff in startup investment, big network infrastructure makers’ R&D budgets are now 90 times larger than the investment going into networking startups –- that’s up from 30X two years ago.

Don’t get me wrong — the Ciscos, Ericssons and Huaweis of the world are responsible for some amazing science and innovation. And today they’re building the small cell and heterogeneous networks of the future. But there are limits to what the big vendors can accomplish. The R&D budgets of the big industrial labs have shrunk immensely in the last two decades, and there’s only so much talent and so many resources those vendors can devote to innovation.  The biggest issue, though, is that the big equipment makers innovate in much different ways than small startups.

Big vendors have big ingrained investments

Look around. A lot of the wired and wireline networks we use on a daily basis have been with us for a while. The first 2G networks in the US went up in the late 1990s and they’re largely still in use. A good part of the big vendors’ businesses is maintaining, upgrading and iterating on the networks they’ve already built.

That doesn’t mean the big vendors are merely redesigning the same old equipment, but they’re definitely looking for continuity with their older networks. Alcatel-Lucent’s lightRadio and Nokia Siemens’ Liquid Radio architectures, for instance, are truly mind-blowing approaches to the new heterogeneous network, but they’re still fundamentally the cellular technologies that have been these vendors’ bread and butter since the birth of wireless.

When Wi-Fi came along as a mobile data alternative to cellular, these vendors were resistant if not outright hostile. It took two startups, BelAir Networks and Ruckus Wireless to make the business case to carriers for large-scale outdoor Wi-Fi networks to supplement 3G and 4G networks.

 

The lightRadio Cube, Alcatel-Lucent’s vision for the small cell.

The big vendors are working largely within global standards frameworks. That’s by no means a bad thing. It’s why an iPhone can communicate with a Nokia-built base station, and a Cisco router can be plugged into an Ericsson core network. But standards work is painfully slow. A lot of the innovation work in networking technology works goes on outside of the standards bodies, and if that work proves successful it wind up shaping the standards themselves.

There’s probably no better example in wireless than CDMA. Qualcomm’s upstart cellular interface was initially adopted by a single US carrier, AirTouch, but it eventually became the basis for all global 3G networks.

Innovating between the lines

While the big vendors have focused on the overarching evolution of networks it’s up to infrastructure core technology startups to fill in technology gaps. Companies like NSN and Ericsson will most certainly handle the large-scale rollout of small cells and hetnets in the future, just like Apple and Samsung will be designing our future 4G smartphones and connected tablets.

But it will be startups like Seattle’s still under-the-radar PivotBeam that are developing the critical software defined antennas that will link these millions of small cells back to the network core. And it will be small engineering companies like Nujira and Quantance supplying the power envelope tracking technology giving those 4G phones a tolerable battery life.

I’m not saying all of these specific companies are all going to be the next Qualcomm, and that you should go invest in them. But they’re part of a critical network infrastructure startup scene, and that scene appears to be shrinking. We’re already starting to see the consequences. The industry has started delivering speed in the form of LTE but it has so far failed to deliver us the cheap capacity critical to moving the mobile industry forward. If the investors keep neglecting network startups, that problem is only going to get worse.

Read more here.

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Zscaler finally accepts VC dollars — and gets $38M

Posted in Board Of Intellectual Capital, Internet Security, Investments, mobile 2.0, Startups, Strategy, Technology, Venture Capital, Venturebeat, Web 2.0, Wireless, Wireless 2.0, tagged , , , , , , , , , , , , , on August 30, 2012| Leave a Comment »

Article from GigaOm.

Zscaler a four-year-old startup that has bootstrapped its business by providing a new form of security designed for a mobile and cloud-dependent workforce, has raised $38 million in first-time financing. The round was led by Lightspeed Venture Partners and an unnamed strategic investor.

Zscaler has been fairly successful in its four years building a significant base of clients including Crutchfield Corporation, La-Z-Boy and Telefonica. The company’s software as a service is hosted in more than 100 data centers around the world and essentially protects a company’s web traffic. It does this by routing requests through Zscaler’s software. But there’s no software for users to download on their clients and there’s also no appliance for corporate IT to worry about.

As the cloud and mobility do away with the perimeter model of security where a firewall may prevent harmful traffic from getting in and corporate secrets from getting out, Zscaler is one of several new companies trying to adapt security to a world where there is no perimeter. And even if the corporate IT thought it had a perimeter, the corporation may not own it or have a say in what runs on it. A perfect example of this might be the CEO’s iPad (a aapl).

Zscaler doesn’t solve all problems, but it’s certainly ahead of the pack in thinking about security in a forward-looking way. Other companies trying to address the changes in security required by BYOD and corporate access to the cloud applications are Bromium and CloudPassage. And by waiting to take on venture capital Zscaler’s CEO Jay Chaudhry has joined a select group of established companies who are finally succumbing to the lure of VC cash. For example Qualtrics, a ten-year-old company this year raised $70 million in its first round of outside investment. Another company, Code 42, avoided VC dollars for 11 years before this year raising $52.5 million.

Read more here.

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Apple and Google Go Head to Head Over Mobile Maps

Posted in Board Of Intellectual Capital, tagged , , , , , , , , , , , , on June 18, 2012| Leave a Comment »

Article from NYTimes.

Locating a tower in San Francisco using Apple’s Maps app.

For many people, phones have become an important way to navigate the world, and mobile maps are at the core of the journey. They are often the critical element in commerce, socializing and search. So far, Google has reigned supreme in the mobile map world, with its maps on every iPhone sold so far — and, of course, on every phone based on its own Android operating system.

Last week, though, Apple gave notice it would enter the battle, announcing that in the fall, its phones would no longer carry Google maps, but instead would have Apple’s own map service built in, part of its new mobile operating system. Maps are simply too important to be left to a rival.

The question is: Can Apple build a map service that does as good a job, or a better one, than Google has?

If Apple slips up, consumers in the highly competitive smartphone market may have a good reason to turn to Android phones. If Apple succeeds, Google will be under pressure at a time when it already has to deal with other competitors in map services.

“It makes Apple more valuable and denies Google a lot of user data, and a brand presence, on the iPhone,” said Ben Bajarin, an analyst with the technology research firm Creative Strategies. If Apple cannot meet or exceed Google’s maps, he added, “it will irk their power users,” who are the most valuable customers.

Apple’s move into maps was not exactly a surprise. It has bought a few companies that make mapping features, like three-dimensional visualizations, and has secured rights to data like the names and layouts of streets in over 100 countries from TomTom, a big digital map company based in the Netherlands.

But making digital maps is not easy. Google has spent years working on its services, pouring all kinds of resources into the effort, including its Street View project to photograph and map the world. It will be hard to duplicate that depth and breadth.

“Apple has gotten into a place that is very technical, quite a challenge, and like nothing they’ve done before,” said Noam Bardin, chief executive of Waze, a mapping service that provides real-time traffic information by tracking the movement of phones.

Still, it would be foolish to underestimate Apple, said John Musser, editor of ProgrammableWeb, an online service that follows mobile application development.

“Apple so far has close to nothing in maps, because they never had a product before,” Mr. Musser said. “But they are hardly empty-handed.”

Mapping technology is a growing field that draws on everything from aerial photography to the movement of the continents, to individual comments on Web sites about a favorite hiking trail or a bad dining experience. ProgrammableWeb counts 240 mapping-related services that people building mobile map applications can draw from. That is up 73 percent from a year ago, and 243 percent from 2009.

Apple has offered few details about its plans for the map service, which is part of the new operating system, iOS 6, that was unveiled at the company’s annual developer conference in San Francisco. Some of the features may come from companies that it now owns. Apple may buy other features — like store locations and hours, and information about walking paths, landmarks and public transportation — from data companies, independent developers and consumer information services like Yelp.

Apple can expect to pay a lot of money for this information. Google declined to comment on what it spends on its map business, but others in the industry estimate that the figure is $500 million to perhaps $1 billion annually, equal to a fifth of its budget for research and development.

For consumers, an important part of the Apple service is likely to be the apps that support and enhance it. This week, Apple is set to widely release its instructions, known as a software development kit, to guide developers in designing these apps.

Those instructions are important to hundreds of independent software developers like Scott Rafer, whose start-up is making user-friendly walking directions for maps, based on things like landmarks and street views. He hopes to produce an app that is a hit in the app store, or even wins Apple’s eye as it looks for more partners.

“We’re all trying to figure out the next 100 days” before Apple releases the operating system to consumers, Mr. Rafer said. “Does Apple want gorgeous features, or do they want ubiquity?”

Read more here.

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For Average Investors, Long Odds on a Big Facebook Payday

Posted in Board Of Intellectual Capital, Business models, Economy, FaceBook, Investments, IPO news, tagged , , , , , , , , , , on May 18, 2012| Leave a Comment »

Article from NYTimes.

Facebook shares will be tempting to buy when they start trading on Friday. The company has hefty profit margins, a household name and a shot at becoming the primary gateway to the Internet for much of the planet.

But if history offers any lesson, average investors face steep odds if they hope to make big money in a much-hyped stock like Facebook.

Sure, Facebook could be the next Google, whose shares now trade at more than six times their offering price. But it could also suffer the fate of Zynga, Groupon, Pandora and a host of other start-ups that came out of the gate strong, then quickly fell back.

Even after Facebook supersized its offering with plans to dole out more shares to the public, most retail investors will have a hard time getting shares in the social networking company at a reasonable price in its first days of trading.

Facebook’s I.P.O. values the company at more than $104 billion. And the mania surrounding the offering means Facebook shares will almost certainly rise on the first day of trading on Friday, the so-called one-day pop that is common for Internet offerings. At either level, Facebook’s price is likely to assume a growth rate that few companies have managed to sustain.

New investors, in part, are buying their shares from current owners who are taking some of their money off the table, a sign that the easy profits may have been made. Goldman Sachs, the PayPal co-founder Peter Thiel, and the venture capital firms DST Global and Accel Partners are all selling shares in the offering.

“It is a popular company, but it is still a highly speculative stock,” said Paul Brigandi, a senior vice president with the fund manager Direxion. “Outside investors should be cautious. It doesn’t fit into everyone’s risk profile.”

For the farsighted and deep-pocketed investors who got in early, Facebook is turning out to be a blockbuster. But by the time the first shares are publicly traded, new investors will be starting at a significant disadvantage.

Following the traditional Wall Street model, Facebook shares were parceled out to a select group of investors at an offering run by the company’s bankers on Thursday evening, priced at $38 a share. But public trading will begin with an auction on the Nasdaq exchange on Friday morning that is likely to push the stock far above beyond the initial offering price.

That is what happened to Groupon last fall. Shares of the daily deals site started trading at $28, above its offering price of $20. It eventually closed the day at $26.11.

The one-day pop is common phenomenon. Over the last year, newly public technology stocks, on average, have jumped 26 percent in their first day of trading, according to data collected by Jay R. Ritter, a professor of finance and an I.P.O. expert at the University of Florida.

In many of the hottest technology stocks, the rise has been more dramatic. LinkedIn, another social networking site, surged 109 percent on its first day in May 2011, and analysts say it is not hard to imagine a similar outcome with Facebook, given the enormous interest.

Unfortunately for investors, the first-day frenzy is not often sustained. In the technology bubble of the late 1990s, dozens of companies, Pets.com and Webvan among them, soared before crashing down.

At the height of the bubble in 2000, the average technology stock rose 87 percent on its first day. Three years later, those stocks were down 59 percent from their first-day closing prices and 38 percent from their offering prices, according to Professor Ritter’s data.

The more recent crop of technology start-ups has not been much more successful in maintaining the early excitement. A Morningstar analysis of the seven most prominent technology I.P.O.’s of the last year showed that after their stock prices jumped an average of 47 percent on the first day of trading, they were down 11 percent from their offering prices a month later. Groupon is now down about 40 percent from its I.P.O. price.

“It’s usually best to wait a few weeks to let the excitement wear off,” said James Krapfel, an I.P.O. analyst at Morningstar who conducted the analysis. “Buying in the first day is not generally a good strategy for making money.”

There are, of course, a number of major exceptions to this larger trend that would seem to provide hope for Facebook. Google, for instance, started rising on its first day and almost never looked back.

Even among the success stories, though, investors often have had to go through roller coaster rides on their way up. Amazon, for instance, surged when it went public in 1997 at $18 a share. But the stock soon sputtered, and it did not reach its early highs again until over a decade later. The shares now trade near $225.

More recently, LinkedIn has been trading about 140 percent above its offering price of $45, enough to provide positive returns even for investors who bought in the initial euphoria. But those investors had to sweat out months when LinkedIn stock was significantly down.

Apple is perhaps the clearest example of the patience that can be required to cash in on technology stocks. Nearly two decades after its I.P.O. in 1980, it was still occasionally trading below its first-day closing price, and it was only in the middle of the last decade — when the company began revolutionizing the music business — that it began its swift climb toward $600.

Facebook’s prospects will ultimately depend on the company’s ability to fulfill its early promise. It has a leg up on the start-ups of the late 1990s, which had no profits and dubious business models. Last year, in the seventh year since its founding, Facebook posted $3.7 billion in revenue and $1 billion in profit.

But investors buying the stock even at the offering price are assuming enormous future growth. While stock investors are generally willing to pay about $14 for every dollar of profit from the average company in the Standard & Poor’s 500 index, people buying Facebook at the estimate I.P.O. price are paying about $100 for each dollar of profit it made in the past year.

When Google went public in 2004, investors paid a bigger premium, about $120 for each dollar of earnings. But the search company at the time was growing both its sales and profits at a faster pace than Facebook is currently.

Facebook may be able to justify those valuations if it can keep expanding its profit at the pace it did last year, a feat some analysts have said is possible. But especially after the company recently revealed that its growth rate had slowed significantly in the first quarter, the number of doubters is growing.

“Facebook, by just about any measure, is a great company,” Professor Ritter said. “That doesn’t mean that Facebook will be a great investment.”

Read more here.

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A Circle of Tech: Collect Payout, Do a Start-Up

Posted in Board Of Intellectual Capital, Economy, Entrepreneurship, Gerbsman Partners, Intellectual capital, internet, Investments, IPO news, Market research, Social Networks, Startups, Strategy, Technology, Venture Capital, tagged , , , , , , , , , , , , on May 11, 2012| Leave a Comment »

Article from NYTimes.

MENLO PARK, Calif. — Matt Cohler was employee No. 7 at Facebook. Adam D’Angelo joined his high school friend Mark Zuckerberg’s quirky little start-up in 2004 — and became its chief technology officer. Ruchi Sanghvi was the first woman on its engineering team.

All have left Facebook. None are retiring. With lucrative shares and a web of valuable industry contacts, they have left to either create their own companies, or bankroll their friends.

With Facebook’s public offering in mid-May, more will probably join their ranks in what could be one of Facebook’s lasting legacies — a new generation of tech tycoons looking to create or invest in, well, the next Facebook.

“The history of Silicon Valley has always been one generation of companies gives birth to great companies that follow,” said Mr. Cohler, who, at 35, is now a partner at Benchmark Capital, and an investor in several start-ups created by his old friends from Facebook. “People who learned at one set of companies often go on to start new companies on their own.”

“The very best companies, like Facebook,” he continued, “end up being places where people who come there really learn to build things.”

This is the story line of Silicon Valley, from Apple to Netscape to PayPal and now, to Facebook. Every public offering creates a new circle of tech magnates with money to invest. This one, though, with a jaw-dropping $100 billion valuation, will create a far richer fraternity.

Its members will be, by and large, young men, mostly white and Asian who, if nothing else, understand the value of social networks. And they have the money. Some early executives at Facebook have already sold their shares on the private market and have millions of dollars at their disposal.

Mr. Cohler, for example, is at the center of a complex web of business and social connections stemming from Facebook.

In 2002, barely two years out of Yale, he was at a party where he met Reid Hoffman, a former PayPal executive who was part of a slightly older social circle. The two men “hit it off,” as Mr. Cohler recalled on the online question-and-answer platform, Quora (which was co-founded by Mr. D’Angelo). He became Mr. Hoffman’s protégé, assisting him with his entrepreneurial investments, and following him to his new start-up, LinkedIn.

Then, Mr. Cohler joined a company that Mr. Hoffman and several other ex-PayPal executives were backing: Facebook.

Mr. Cohler stayed at Facebook from 2005 to 2008, as it went from being a college site to a mainstream social network. One of his responsibilities was to recruit the best talent he could find, including from other companies.

Mr. Cohler left the company to retool himself into a venture capitalist. He has since been valuable to his old friends from Facebook.

Through his venture firm, Mr. Cohler has raised money for several companies founded by Facebook alumni, including Quora, created in 2010 by Mr. D’Angelo and another early Facebook engineer, Charlie Cheever. Other companies include Asana, which provides software for work management and was created in 2009 by Dustin Moskovitz, a Facebook co-founder; and Peixe Urbano, a Brazilian commerce Web site conceived by Julio Vasconcellos, who managed Facebook’s Brazil office in São Paulo.

Mr. Cohler has put his own money into Path, a photo-sharing application formed in 2010 by yet another former Facebook colleague, Dave Morin. Path is also bankrolled by one of Facebook’s venture backers: Greylock Partners, where Mr. Hoffman is a partner.

And he has invested in Instagram, which was scooped up by Facebook itself for a spectacular $1 billion. “Thrilled to see two companies near and dear to my heart joining forces!” Mr. Cohler posted on Twitter after the acquisition.

Instagram clearly was a good bet; it is impossible to say whether any of the other investments Mr. Cohler or other Facebookers are making will catch fire or whether the start-ups they found will last. Certainly, there is so much money in the Valley today that start-ups have room to grow without even a notion of turning a profit.

Ms. Sanghvi, one of the company’s first 20 employees, married a fellow Facebook engineer, Aditya Agarwal. Mr. Zuckerberg attended their wedding in Goa, India.

Read the rest of this article here.

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