Dr. David Liddle, a pilot, finds it hard to access the online flight planning services from his Blackberry—possibly a driver for this general partner at U.S. Venture Partners to invest in the wireless sector. He does enjoy using his GPRS-enabled Blackberry, which allows him to receive his phone calls and store phone numbers, while also to access emails, read documents, set up a calendar and, what’s more—update it wirelessly! Liddle hopes his Blackberry provides him a better browser experience in the days to come.

Gaurav Garg, partner at Sequoia Capital Partners agrees with Liddle’s comments on the browser for wireless devices—“the least they could be is ergonomic!” comments Garg, referring to the tiny keyboard on the RIM product. Garg firmly believes that the cell-phone is going to be the next computing platform. “A lot of innovation is yet to come. We haven’t seen the browser of the wireless world. I personally believe that the next Jerry Yang (Yahoo!) or Steve Jobs (Apple) will be a 22 or 23 year old entrepreneur from Korea or Japan, who will look at the wireless world in a different way.”

Like Liddle and Garg, most of the active investors in the wireless space have their footprint in probably all segments of the space. As Liddle puts it, “the state of the markets are different; opportunities are quite different.” Venture business is indeed a risk-oriented business and it makes sense to spread those risks.

Wi-Fi Space: Anything new?
About three years ago, venture capital firms began to pour money into 802.11a startups. Many of these startups were racing to deploy “hot new” technologies such as 802.11a. From security software to semiconductors and to so-called hot spots, nodes offering Wi-Fi Internet connections in the airports, hotels and other public places has rendered this space stiflingly crowded. Wi-Fi has spawned more than 190 start-up companies during the past three years, drawing more than $1.5 billion in capital.

Venture capitalists believed that the demand for the technology would make the firms attractive takeover-targets or IPO candidates. However, the reality is quite different.
Today, there are already several sources for 802.11a and 11g chip sets, and startups are finding it difficult to differentiate their products from those of their rivals. As the market has grown, big companies such as Agere, Atheros, Broadcom, Conexant (through acquisition of Intersil), Texas Instruments and Intel have stepped in, leaving little room for smaller vendors. The Linley Group estimates total 802.11 chip set revenue will be about $550 million in 2005, enough to support only a few large vendors and a few smaller vendors. There is already a noticeable tapering-off of VC investment in this segment.

Despite the introduction of new technology such as 802.11g, this market is rapidly moving from innovation to commodity status. “There is no room for a great deal of innovation in the basic Wi-Fi or 802.11a/b/g space,” says Liddle.
Although investments in chipset companies declined somewhat, investments in Wi-Fi components and hardware increased, especially in companies targeting enterprise Wi-Fi, where future growth is projected. Added to this, many venture capitalists are hot on investing in companies that provide application software for the Wi-Fi space. But we need to still wait for the “killer app” for Wi-Fi—and no venture partner is willing to predict what that could be.

It’s not just the VCs who are hot in the Wi-Fi space. Even big IT firms are earmarking investment dollars for 802.11 startups, in hopes of later integrating the technology into their offerings. For example, Intel has been investing in smaller Wi-Fi companies for the last two years. Motorola’s venture arm has also been actively investing in the field.

Others are buying established companies. For example, Cisco, making a play for the small office/home office market, acquired Linksys, the leader in consumer wireless access points, for $500 million.

What’s driving interest in this space? Douglas Leone, partner at Sequoia Capital Partners sees demand for wireless from cellular players, enterprises and consumers. Enterprise-wide adoption of wireless LAN (Wi-Fi networks) and the demand from cellular operators is driving the wireless infrastructure and wireless applications segment. “With an increase in number of laptops and hand-held PCs within the enterprises, the network dynamics is changing,” says Leone; and wireless seems to be a better and efficient way of networking.

The carriers and cellular operators are beginning to implement wireless services in order to retain existing subscribers and lure more customers. Wireless service began to receive more visibility through widely publicized service rollouts and the establishment of “hotspots” in places like Starbucks. In addition to such hotspots, today many universities are rolling out campus-wide wireless access facility.

“Going forward, many new applications will be developed in demand to the changing market. If you are building an access point, there are already over 180 vendors—it is a mature market. There is definitely opportunity to build other applications, but anybody doing so should think creatively. There is a long runway ahead of us,” says Garg.

Many entrepreneurs who have forayed into the wireless space say, “Wow, it’s wireless; the market is huge.” However, VCs like Leone look at it in a different way. “When I look at a market, I don’ look at its size and growth. I look at the growth margins. Then I look at whether the market can be accessed. There might be a huge market in China, but as a startup, can I access it? Startups should note that selling a point solution to carriers is a difficult business. Carriers have long buying cycles. They put you on trial for months and after that they will tell you how much they will pay for your product—and that decides your growth margins. Getting a startup to sell to carriers or large incumbent players as outsourcer or channel is tough. As a startup one needs to be incredibly laser focused and develop point solutions for a very simplistic point need,” says Leone, whose other comment is that the enterprise is the sweetest market—short sales cycles, good deal sizes and easy growth.

Wireless Security
One of the primary threats to the wide proliferation of Wi-Fi is security. “It is a legitimate concern that will keep many corporate users on the sidelines,” says Liddle. “I don’t think the wireless security problem has been solved as well as it needs to be.” Right now, Wi-Fi networks are perceived as having gaping holes. But in the longer run the Wi-Fi is supposed to keep corporate computer networks safe and secure. Thus, many security-minded start-ups have been formed to meet the challenge. In fact, so many companies have sprung up that the category is “over-funded.” There are interesting firms with interesting approaches and it is anticipated that financial companies, health-care concerns, governments and universities will be avid purchasers of Wi-Fi security software.

“There are no walls left in the enterprise,” says Garg, “People take laptops in and out. The whole fundamental enterprise security infrastructure is gone. One has to rethink the whole problem from scratch. It is a huge pain point and it’s an opportunity for startups to build a system solution.”

Emerging Technologies
Even as Wi-Fi gains momentum, developing new wireless technologies like UWB, WiMax could take a bite out of Wi-Fi’s growth.

Ultra wideband (UWB) allows data to be transmitted at a rate of 1 gigabit per second, which is nearly 10 times the 100 megabits per second of today’s fastest Wi-Fi connections. Although UWB has a much shorter range (30 to 60 feet) compared to the 100 to 200 feet range for Wi-Fi, it could be enough for many uses.

Overall, the market is expected to grow from zero to nearly $6 million. UWB nodes will be embedded in various devices by 2007, according to tech consultancy In-Stat/MDR.

Yet another emerging wireless technology, called WiMax—or 802.16—supports data-transmission rates of up to 70 megabits per second, within a 30-mile radius of a WiMax antenna. 802.20 standard targets mobile broadband applications. “Last mile solutions like 802.16 are likely to be popular first in areas where the last mile infrastructure is limited and come later to places where there is lot of infrastructure. My guess is China and India are likely to go faster before it gets deployed in the U.S. in a big way,” says Garg.

The combined market for 802.20 and WiMax hardware should reach about $1.5 billion by 2008, according to ABI Research, a tech consultancy in Oyster Bay, N.Y. WiMax aims to boost silicon volumes and drive down equipment prices. But will this be enough to get this standard off the ground? “There are no products available yet that are built around these speculative standards. However, the opportunity exists. There are neither large incumbent players or even early stage companies that have significant tractions as yet,” says Liddle.

Lessons to Startup
The key to success for startups is to stay as close as possible to the standards. “It takes three to four years for any technology standard to be ratified. It will take at least another four years for services to be built around the technology and widely deployed. So from the beginning of the technology it is a eight-year cycle for a startup to see some traction,” says Izhar Armony, Partner at Charles River Ventures.

“One has to accept the fact that as the standard evolves there will be changes. The startup company might lose a quarter in its development. That is fine and is in fact part of the risk. If the company waits till the standard is ratified and then starts building a product, the company will, undoubtedly, lose to someone who moved quickly. That’s the part that makes it a gamble,” says Leone.

Proliferation of technologies will depend on who’s backing them, acceptance by the carriers and market adoption. For instance, WiMax is being pushed by the likes of Intel. It is too early to say which technology will rule the landscape. “Even though bigger companies closely follow the standards process and invest in R&D, they are cautious in their move. They keep a close watch on how the smaller players (startups) are fairing and whether there is a market demand and then alone commit serious resources. We will see that happening in the UWB space. In 2004, there will be no UWB product shipment. In 2005 there will be a fair number, mostly by smaller participants. In 2006 we will see a number of semiconductor companies who will foray and participate actively,” predicts Liddle.

“Startups have to do something such that they don’t step directly on the toe of the giants. The best bet would be to focus on an area, which everyone is going to ignore for a while. Because it is so small, it takes time to get attention from product managers of big companies, and that will give significant growth rate for you to have a lead in the space,” says Garg.

What’s more, when start-ups are developing breakthrough technologies that don’t lend themselves to self-sustaining business models, venture capitalists are more cautious and realistic when it comes to investing.

It is important for startups to maintain the defensibility of their product. “Startups have to proclaim its visionary team and flexible architecture. Their focus has to be executing one project better than everybody else. Once they have a differentiated product, they will get reference customers and based on that they can grow rapidly. All along, the incumbent will be partially stuck with its installed base.

While sometime in the future, the incumbent may try to build the product—though there are organizational structures that prevent them from building it. And so they acquire a startup—but rarely do they acquire a No.1 startup in the space, as it will be expensive. Usually the No.1 player will get half the market value. So the incumbents search value deals and they are stuck with an inferior product,” says Leone, encouraging the entrepreneur world forward.

Whether it is WiMax or Wi-Fi, there is venture capital still available to be invested. In the first quarter of 2004, $323 million was invested in the wireless sector, which was substantially higher than $242 million invested in the first quarter of 2003. Heartening news, indeed, for the entrepreneur world.