Wireless continues to be one of the most active areas of venture capital investments. The year 2004 saw $951 million dedicated to wireless deals, up from $820 million in 2003—although still nowhere close to the $4 billion invested in wireless in 2000. In the first quarter of this year, the investments in wireless totaled more than $215 million, according to a MoneyTree survey.

“Investors are excited about the sector because the wireless industry continues to grow globally, many late-stage companies are financially successful and M&A activity has been robust,” says Rajeev Chand, a senior equity research analyst at Rutberg & Co., a San Francisco investment bank.

VCs are betting on emerging sectors like Carrier Products, Mobile Content, Enabling Technology, Wi-Fi, Cellular, Wireless Messaging, Mobile Broadband Equipment, enterprise WLAN infrastructure and enterprise RFID solutions among others.
While the current investment environment may be ideal for entrepreneurs, it isn’t so conducive for venture capitalists. Now that there’s more investment in wireless companies, it’s difficult to find good companies. “Even if a particular segment is ‘hot,’ not all startups will figure out what are the right things to do,” says Michel Wendell, General Partner at Nexit Ventures.

Most Venture Capitalists today are looking for companies that will provide technologies and services that will drive the wireless technology revolution in the months and years ahead. But the wireless market is changing so fast that investors are finding it difficult to nail those real ideas.

Enterprise-facing Wireless
Within enterprises, the percentage of IT investment dollars devoted to wireless sensing is accelerating. The integration between mobile telephony and wireless LANs offers some opportunities for entrepreneurs. Middleware is important because a lot of devices are deployed across the enterprise. “We’re seeing a lot more devices, iPAQs, Palms, Blackberries, and a lot of different technologies like 802.11a, b and g, 2.5G, 3G and Bluetooth. You need the middleware to connect to and manage those devices,” says Ben Boissevain, managing partner of Agile Equity LLC, a New York investment banking firm.

These developments open up opportunities in the wireless security space. “We have just seen the first set of viruses attacking mobile phones. For enterprises, security is a main concern, especially where transactions are involved. There is tremendous scope for innovation in the wireless security space,” says Wendell.

Carrier-facing Wireless
The major carriers have completed multi-billion dollar upgrades of their wireless networks and are now looking for ways to pay for these improvements. VCs and startups alike will certainly be looking to jump on this opportunity, but the newness of the area also makes it one where they’ll have to step carefully.
In 2004, carrier application startups raised more than $305 million in venture capital, surpassing the $164 million such startups raised in 2002 and 2003 combined, according to Rutberg. These companies develop handset applications such as games, e-commerce, email and ring tones and offer these applications through wireless operators to consumers and businesses.

The Go-to-Market strategy is crucial. Tim Chang, Principal at Gabriel Venture Partners cautions entrepreneurs building applications for the carrier space. “Tier 1 carriers are clamping down the number of suppliers. Getting to them [Tier 1 carriers] might be tough. Entrepreneurs should look at the Tier 2 carriers who are aggressive and are looking for differentiating factors. By getting traction in the Tier 2 space, entrepreneurs can hope to get to negotiate with front line carriers. There must be very active users of your application if T1 carriers have to sign up with you.”

Consumer-facing Wireless
Startups and their investors are banking on the growth of mobile subscribers and increased interest in new services for phones. The mobile phone market is projected to peak and hit 610 million unit shipments this year, marketing and research company Semico Research Corp. of Phoenix reported in September. But smart phones, which support advanced functions such as streaming video, are projected to skyrocket from 32 million units in 2004 to 150 million by 2008.

With the use of mobile devices, the need to consume, process and generate content is increasing at a staggering pace. Growing consumer interest in graphics, images, music and video is driving applications such as games, MP3 players, cameras and TV reception on mobile devices ranging from high-end all-in-one handsets to the most basic mobile phones. This throws up enormous opportunities for entrepreneurs.

Many investors like BlueRun Ventures, formerly Nokia Venture Partners, take a global approach to their portfolios. Sujit Banerjee, Principal at BlueRun Ventures says his company looks at wireless from a global perspective and determines what types of technologies or services will be important in different markets. For example, mobile software and mobile payment services are very big in China. In India, more basic infrastructure technologies such as RF baseband processors are key.

Regardless of location or technology, every entrepreneur needs to focus on the fundamentals, understand the intricacies in the wireless value chain and target the market.