PrintMayfield Fund News: November-December 2007
In this issue:
• In the News
• Mayfield View: Managing Directors Navin Chaddha and Janice Roberts discuss
the drivers behind
the resurgence in the communications sector.
• Guest interview: Veteran networking entrepreneur and angel investor Desh Deshpande,
co-founder of Sycamore Networks, Cascade Networks, and Tejas Networks.
» Investments: Tejas Networks receives funding from Goldman Sachs
» Investments: Wall Street Journal Highlights WiChorus as New Wave of Indian Company
» Investments: Deca.tv nabs $5 million for online studio
» Investments: Mayfield Invests in Gaming Company Acclaim Networks
» Media: Playfirst featured in CNNmoney.com
» Media: Slide profiled in BusinessWeek
Mayfield View:
Managing Directors Navin Chaddha and Janice Roberts, who guide Mayfield’s communications and networking investments in the U.S., Europe and India, discuss the drivers behind the resurgence in the communications sector.
Today, seven million people in India sign up for new phone service every month, with China following closely behind, according to analysts at Rutberg & Co. With this rapid pace of growth, it’s no surprise that global phone connections are expected to top 3 billion by the end of this year, up from 2.6 billion in 2006. New investments, needless to say, come hand in hand with this growth. In 2006, $6.4 billion was invested into wireless related companies focused on everything from mobile TV and video to carrier infrastructure to device design, according to Rutberg. As these startup investments continue at a rapid clip, we’re seeing successful exits, too, with broadband wireless equipment maker Airvana, multimedia wireless infrastructure provider Starent, and next generation optical networking equipment provider Infinera executing a few of the more successful IPOs since the beginning of 2006.
Here are a few trends we’re tracking at Mayfield.
- Broadband everywhere: Ubiquitous wireless and broadband connections now deliver high-speed data services to not one device but multiple services to many devices. “You used to deliver TV shows to a TV, now you’re delivering TV to PCs and TV to phones,” Roberts says. For wireless carriers, the challenge to provide this coverage is in combining WiFi access points and making those networks interoperate with 2G, 2.5G – and eventually with 3G and WiMAX.
The first broadband wave brought fixed offerings enabled by companies like Redback Networks, which provided a way for service providers to sell customers more affordable services using the IP communications protocol. In this second stage, the mobile broadband market is evolving, driven by startups that build corporate wireless LAN equipment and wireless broadband equipment for carriers. Others are focused on building better service through load balancing, caching, and quality of service technology, all required behind the scenes to make these wider wireless networks run smoothly.
The ubiquity of broadband is also leading to increased use of video: “I think Cisco’s John Chambers, in terms of how he talks about the infrastructure and application of video, is really important to the future of the industry,” Roberts says. “What’s key here is capacity and the standards-based enabling technologies.”
- The rise of fixed-mobile convergence: Customers are demanding the same phone number in their home and on their cell phones, which is driving the convergence of wireless and home networks, along with new services like VoIP.
Meanwhile, carriers and service providers are working to iron out issues of coverage in the home through femto cells and backhaul to provide unified communication services. On the cable front, companies like Comcast are offering triple-play services including voice, video and data on next-generation networks. In Europe, service providers are already testing “quad plays,” with consumer services that include voice, video, data and TV.
- More efficient business models: Companies have adopted a radical business model, building communication/networking products at a fraction of what it cost in the 1990s.
For example, Tejas Networks, which makes optical-edge equipment that carries voice, data and video over a network, took $30 million in startup funding to turn profitable. In the past, a similar company in the U.S. could have easily nabbed $100 to $150 million.
In India, where Tejas does business, the pressure to offer services at cheaper prices is intense. There, the carriers demand low prices for products, paying about a fourth to a fifth of what their counterparts in Western Europe or the U.S. pay. But because R&D and SG&A are cheaper in India, Tejas was able to become profitable with a fraction of the capital it would take for a company based anywhere else.
“Tejas’s approach is only one of many in a world where old models no longer work,” says Chaddha. “A communications product company funded with hundreds of millions of dollars is just not the model anymore.”
The challenge for communications equipment startups today is to figure out how to make money at a 30 to 40 percent gross margin, as the 70 percent gross margin that formerly existed for many startups no longer exists, Chaddha says.
- Early adopters are outside of the U.S.: New communications patterns are typically crystallized today by early adopters outside of the U.S. in places like India, Europe and China, where the most bleeding-edge development is happening.
So-called “extreme users” overseas are testing technology, such as WiChorus’s wireless networking equipment for rolling out WiMax, in markets where land lines aren’t readily available for Internet access. In China, voice SMS services provided by telecom giants like China Mobile are exploding, though these services have yet to catch on in the U.S.
Going forward, investors can expect a wealth of new opportunity in this sector, both in the U.S. and abroad in everything from WiMAX to Femto cells to IPTV. One thing is clear: communications equipment startups today are creating more innovative businesses with less startup capital. And the consumers – particularly those in China and India – are playing a more important role than ever in dictating the technology of tomorrow, regardless of whether it’s for users toting laptops or cell phones at home, on a train or at work.
Guest Interview:
Veteran networking entrepreneur and angel investor
Desh Deshpande,
co-founder of Sycamore Networks,
Cascade Networks, and Tejas Networks.
Desh Deshpande is a veteran high-tech entrepreneur and angel investor whose networking innovations have helped reshape industries. In 1998, Deshpande co-founded Sycamore Networks, where he remains chairman. Prior to Sycamore, he founded Cascade Communications, which was sold in 1997 to Ascend Communications for $3.7 billion. He serves on the Board of MIT and his donations helped create MIT’s Deshpande Center for Technological Innovation. He is also the founding investor of Airvana, Tejas Networks and A123 Systems. He serves as the chairman of Tejas Networks and A123 Systems.
Mayfield: Where are you seeing key areas of opportunity in the communications sector right now?
Desh Deshpande: On the East Coast, Airvana, Starent, and Acme Packet went public recently. There’s a lot of growth in wireless infrastructure and wireless applications. The whole network is becoming IP-based, and the movement of IP packets is creating opportunities.
Mayfield: Can you talk about what’s happening globally in communications and how markets are changing?
DD: Twenty years ago networks were very different around the world. Every country took pride in architecting the networks differently. Products were first developed in U.S. for its market. Then the products were modified to suit the European market, then the Japanese market, and finally to markets in Asia – after a lag of a decade or two. If you fast forward, today all countries build networks to the same architecture; they all have to be a part of the global network to participate in the global economy. Therefore, the networking products you need to build networks are more or less the same everywhere in the world. It is truly a global market now.
The products required to build the network have different margin profiles. Some products like handsets will have very low margins. Some others will have a 30 to 40 percent margin and some will have 50 to 70 percent margins. The higher margin products will be developed in the U.S. The 30 to 40 percent margin products will be developed in India and China.
The networks in India and China are growing very fast. In fact, India added 8 million handsets last month. A large domestic market, low cost of development and highly skilled talent makes India a sweet spot to build Global Telecommunications Product companies.
Mayfield: What defines a next-generation network?
DD: Previously when people built the infrastructure it was to last 30, 40, 50 years. In the Web 2.0 world product cycles are short. With all the open source software you can create applications in two or three months instead of years.
With convergence we use the network for all sorts of different things. As a result, the network we create has to be very flexible. The way we control and monitor the traffic has to be very nimble. It doesn’t matter what device you are using on the network, you need to accommodate any application that comes along.
Mayfield: Do you have any advice for entrepreneurs starting companies here and abroad?
DD: To start a company in India you need a long-term execution plan. You build a company that can dominate a certain segment of the market. You accumulate talent and quickly get to profitability and positive cash flow. If you build the engine for product development and distribution for global markets in India you can continue to plug different products into this machine and build a company for the long term.
In the U.S., every start up always starts with a technology angle. You need something that nobody else has. To survive you have to grow fast and create a critical mass to survive. Otherwise you become a part of something else.
Mayfield: What about entrepreneurs who build to sell?
DD: It’s hard to build a company to sell. Sometimes companies get lucky and get bought out for a high value. Most of the companies built to sell get tired and die. It is like swimming laps in the swimming pool. If you think you are only going to swim five laps you get exhausted when you get to the fifth lap. However, if you set out to swim 100 laps, the fifth lap does not feel that tiring.
There are always opportunities for entrepreneurs and I want to wish them well in their long entrepreneurial journey.
