In its latest report, analyst firm Ovum says that VC support for telecom infrastructure start-ups has dropped it does find cause for optimism, pointing to the fact that recent IPO and M&A transactions indicate a rebound in VC interest in telecoms, specifically in network infrastructure.
“The good news is recent IPO and M&A deals do suggest that VCs are looking favourably on the telecom sector again, when telecom is defined broadly. For instance, VC-funded start-up Nicira Networks was recently acquired by VMware for US$1.26bn,” says Matt Walker, Ovum Principal Analyst and author of the report.
“The tide seems to be shifting. With heightened investor interest and carrier need for solutions in such areas as small cells, network virtualisation, and network optimisation, telecom network infrastructure VC seems ripe for a rebound.”
And, while VC support for network infrastructure has declined, overall VC investments have recovered, according to Ovum, growing from US$20.1bn in 2009 to US$27.8bn in the four quarters ending in the second quarter this year, with some of the beneficiaries of this modest surge including Facebook, Groupon, Twitter, LivingSocial, Square, Lashou, Kabam, WhatsApp, and Spotify.
According to Walker, a “funding disconnect” has emerged between network builders and network users, and he observes that lots of innovation and venture capital is targeting the network users, such as mobile apps and OTT platforms.
However, Ovum points out that little of the VC funding 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.
“Incumbent vendors’ internal R&D budgets are now nearly 90 times larger than VC investments in the sector, up from 30 times two years ago. This narrows options for service providers, who rely on both large and small vendors for innovation. The big vendors also need access to the start-up pipeline, to fill in gaps in their own portfolios through partnership and M&A.”
In response, Ovum reports that service providers are getting more actively involved in funding and working with start-ups, with Telefonica, Vodafone, Verizon, AT&T, KDDI, China Mobile and many others now funding start-ups directly, often deploying products in the network or lab ahead of commercial availability.
Ovum also points to Deutsche Telekom (DT), which earlier this month was the latest carrier to announce a new push on the venture side, revamping its T-Venture unit to foster purchase of majority stakes and accelerated disbursement of funds.
“Carriers really need help from suppliers, yet what they face is a vendor market in confusion. Most large vendors are now shrinking and reorganising, even the Chinese suppliers. Several vendors are modifying business plans and selling assets in order to stay solvent. With the recent VC drought in networking, it’s not surprising that big telcos have become more directly involved in funding start-ups,” Walker said.