Money is where the mouth is
VCs are shifting their focus to software and hardware that keeps cell phone conversations connected.


February 13, 2002
2002 Red Herring
By Julie Landry





Forget the gee-whiz wireless applications that didn't pan out last year. This year, venture capitalists are shifting their focus to the software and hardware that help keep cell phone conversations connected. Like the rest of us, VCs aren't going near fancy data services until they can make regular cell phone calls that don't crackle, pop, and drop.

"You only have to drive down 101 [in Silicon Valley] and have your call dropped three times to see that the voice quality isn't there, even though the voice network has been built out for 15 years," says Michael Rolnick, a partner at the VC firm ComVentures.

These new investments tend to require more dollars plowed into fewer, but larger, companies whose products mobile carriers need--not just want--to continue improving service. As evidence of this, just look back at the second half of 2001, when venture firms invested $320 million in just 14 wireless communications companies, compared with nearly $300 million in 35 companies during the first half.

Improving the voice network makes financial sense for carriers because better quality typically means longer and more frequent cell phone calls, which theoretically lead to bigger bills. Littlefeet, which has raised nearly $60 million from Bay Partners, ComVentures, and others, helps operators improve the efficiency of their base stations by installing multiple low-power antennae.

Equipment cost is another challenge for wireless carriers that are adding customers and entering new markets. To cut down on the high cost of installing base stations in a new area, companies like Israel's Celeritas--which raised $11 million last year from Charles River Ventures, Pitango Venture Capital, and Ridgewood Capital--are developing products that use free space optics to beam signals from a base station to antennae that are better positioned to send and receive transmissions.

Carriers have also been attempting to increase mobile revenue by adding new equipment (and therefore coverage) inside high-traffic buildings, like malls and airports. This also is designed with the underlying belief that better coverage will encourage consumers and businesspeople to use their phones more. In September, LGC Wireless raised $19 million from Allegis Capital and Crystal Internet Ventures, adding to the $52 million it had already raised from Mayfield and others for the continued development of its distributed antenna system, which picks up a signal from the nearest base station and transmits it to smaller relay stations throughout a designated building.

Once voice networks are more reliable, consumers may begin using wireless data services. One of the biggest and boldest bets based on that very premise is Flarion Technologies, a Lucent Technologies spin-off that scored a $45 million second round from Bessemer Venture Partners, Charles River Ventures, Cisco Systems, and a slew of other big backers in March last year. Like many of its peers, Flarion is capitalizing on carriers' frustration with their current equipment, but has chosen to build its own high-speed data network from scratch, rather than make incremental improvements to today's technology.

Flarion's network, which is interoperable with existing wireless local area networks (LANs), will be three times as effective with spectrum use, and ten times cheaper for carriers to handle, says Bruce Sachs, a partner at Charles River and a Flarion director. One unnamed major carrier started a marketing trial in first quarter 2002 and has promised to deploy it in select regions if the trial is successful.

Most investors are wary of plays that involve big leaps, however, and have stuck with backing companies that have wireless data technology that targets businesses, many of which are likely to implement wireless LANs in 2002. "It's evolutionary, not revolutionary," says ComVentures' Mr. Rolnick. "Corporate enterprises can already see the productivity gains."

For now, the main problem companies face when deciding if a wireless LAN is a worthwhile investment is how to ensure that employees stay connected to the network once they leave the office. Bluesocket, backed by $7.5 million from St. Paul Venture Capital and Osborn Capital, will enable users to roam from the wireless LAN range to an offsite general packet radio service network. Neomar, which has raised $23 million from Clearstone Venture Partners, Research in Motion, and 724 Solutions, sells software and routers that help companies move their internal data onto wireless networks.

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