The mobile and wireless industry is one of the most interesting and prominent growth areas in technology today, especially for investors. The introduction of broadband access on mobile devices represents a huge leap forward for ubiquitous wireless –anytime, anywhere access to a rapidly expanding selection of applications and services. But while the technology is hot, today’s economic climate is undeniably cold. Investors are left wondering how the economy will affect the mobile and wireless marketplace and what steps companies can take during these difficult times to stay vibrant.
|Danford: VC investments in wireless remain solid.|
For venture capitalists (VCs) focused on early-stage investments, the current economy is a concern as liquidity is constrained and the IPO window on NASDAQ is closed. Early-stage VCs are investing in the forthcoming business cycle, and right now is an ideal time to begin building the next great wireless company. Some of the best investments were made in the darkest of economic times (in particular, during the rise and fall of the telecom and Internet balloons).
When analyzing venture returns against NASDAQ performance, you find a 3-year lag in venture returns, provided the NASDAQ is in positive territory. Bad times don’t necessarily call for unusual or heroic efforts – they require that investors make smart moves. They must drive their businesses effectively, ensuring that these investments remain capital efficient. While challenging, continuing to manage toward profitability is not impossible. This executive tactic allows mobile and wireless companies to remain sharp and make the most salient business decisions. Whether the economy is good or not, this factor remains the same.
While the IPO window has closed temporarily and fewer acquiring suitors are available, innovation in the mobile and wireless sector remains second to none. When the economy moves again, the most innovative mobile companies will reap the benefits of their business acumen and refocus on profitability, entrepreneurial vision and innovation. When investing in startups, early-stage VCs don’t expect to see real momentum for at least 15 to 18 months. This also doesn’t change with economic factors. The filter is tightening on the market, but young companies will continue to be funded at the same pace as before.
Whether investing in young, emerging or high-growth wireless companies, investors must see real value created – or, more specifically, identify and really know their customers’ pain points and have the ability to sell to those pains time and time again. In addition, investors must have visibility into the revenue stream. If not obvious today, companies must be able to see their future and directly map to it. This, too, is critical regardless of what’s happening in the national or global marketplace.
MAPPING A COURSE
Credible investors are reluctant to fund a company that hasn’t figured out what it’s doing, what its value proposition is and how it will build its customer base and revenue. This remains true even if a down economy gives young companies more time to realize and map success.
Of course, some of this worry over the effect of the economy on the VC scene is valid. The latest data from VentureSource suggests that last year there were 844 venture firms investing in U.S. companies, 40 fewer than in 2006. This trend is likely to continue in the coming year or two as firms try and fail to raise new funds without realized gains. Portfolio investments on the verge of exiting may have to wait a while for the “window” to open up again, and the downturn might require making investment funds stretch longer than intended.
But as noted above, the VC industry will weather the storm. In many ways, we’re sitting at a near-perfect time for some immediate investments – we’re at the bottom of a business cycle, and by the time any company invested in today is ready to exit, we should be out of the slump. This is particularly true in the mobile and wireless sector.
One example of a bright area in the wireless and mobile sector is investments in smartphones and mobile enterprise applications. The constant evolution of cell phones and the desire for the latest hot, new features and updates are what drive the industry today.
Although some of these features may be novelties, like ringtones or backgrounds that you can compose yourself, others may prove to be useful, especially in the business world. As smartphones become more important, millions of professionals around the world will begin using them increasingly for work. The use of applications on these devices will exceed the simple business phone call and serve essential business functions that give individuals Employee-Consumer control over their mobile applications.
Applications will begin collecting data for business intelligence, handling transactions and becoming even more personalized. With the speed that these features hit the mass market in conjunction with the introduction and expansion of broadband to our mobile devices, mobile enterprise applications certainly have an exciting and promising future.
The development of these mobile enterprise applications will bring about a need for mobile security. At some point, the average mid- to large-sized business will have hundreds, possibly thousands, of employees using their mobile devices to conduct business-critical work. As this private information is transmitted wirelessly across a number of mediums and networks, the need for protection will be evident. Although investments in mobile security are expected to lag behind the rise of mobile enterprise applications, security for wireless applications will become essential and investments will follow suit with this necessity.
Mobile entertainment also will open up opportunities for investment in the wireless sector. Many cell phone users are already capable of surfing the Web and watching their favorite music videos. Soon they will all be able to download entire movies and access other high-bandwidth material. The potential for targeted mobile advertising will thus become a means by which providers can compensate for the high costs of delivering this type of content to users. The time users spend looking at such advertisements will increase exponentially, and the investment market for targeted mobile advertising is still very green, full of tremendous opportunity for future growth.
The iPhone has already begun to demonstrate the investment potential of wireless and mobile innovation, despite economic cooling. Its introduction into the consumer marketplace has expertly shown the world the possibilities of mobile and wireless innovation.
Now it is time for operators to truly embrace an open architecture and open application policies that foster true innovation. Further, 1.5 billion new subscribers are expected to appear on mobile networks in the next five years, and the next 1 billion or so of those subscribers’ Internet experience will be only through their mobile devices. The level of consumer demand, eventual need for security and potential for targeted mobile advertising opportunities is as great or greater than it was during the early years of the Internet.
Imagine the revenue possibilities, assuming sound investment principles remain withstanding, when the frost begins to thaw and the economy heats up again.
Danford is a technology partner at Storm Ventures.