Purse strings are loosening for wireless companies as the industry relaxes the tight fists of the past few years.
In spite of the risks, venture-capital companies say wireless is a good place to throw money. In July alone, 41 wireless companies announced $570 million in new funding, according to Rutberg & Co.
The investments covered the semiconductor, application enabler and enterprise infrastructure sectors, according to the study, adding that 32 mergers and acquisitions were born during the period, including Symbol Technology’s $230 million acquisition of Matrics Inc.
August has witnessed its own burst of funding for companies such as Mforma, Idetic Inc. and NextG Networks. Gizmondo Europe Ltd. has created what it describes as “a new game innovation fund” for emerging developers in the gaming sector.
“It’s one of the areas where the forces of growth and change are strongest,” said Kevin Efrusy, principal at Accel Partners, one of the many companies pouring money into wireless firms. “That leads to new investment opportunities.”
One of the big reasons for this enthusiasm is the standardization of mobile Java, or J2ME, in handsets and the series of applications it has spurred, said Efrusy.
“We’ve seen the first wave,” he said, adding the industry is on the verge of benefiting from a flurry of next-generation services.
Other areas like anti-worm security, systems management and diagnostics are generating interest because they are community based and apt to attract a huge pool of customers, Efrusy said. These new systems allow carriers to provide better services than their competitors.
But the VCs also face challenges. “It’s a risky business,” said Efrusy. “The biggest challenge is navigating between the often divergent interests of the carriers, handset vendors and equipment manufacturers.”
Most of the players have competing solutions, so funding a company involves the risk of depending on the success of the funded company’s partner solution. He explained that incumbent vendors control access to customers, and carriers have great purchasing power and often wait for standards. Start-ups have little patience for standards, as they want to try their products early and win traction.
The raft of applications point to increasing interest in mobile content, and Mforma has staked itself as a player in that area. But the company admits that the risk is enormous, forcing VCs to demand tenfold or more of their investment, according to Robert Tercek, chief strategy officer for Mforma.
Efrusy agrees. “We would like to make tenfold at the early stage,” he said. “It depends on other factors like the completeness of the product and teams, the number and quality of customers and the maturity of the market.”
Tercek said most of the firms seeking and attracting funds tend to have limited appeal and narrow markets, adding investors in regional, small or second-tier players are also taking risks. Those risks compel the VCs to take a lot of control in the invested companies. In addition, the plethora of small firms trying to make it in wireless will lead to consolidation. Using money from its recent funding rounds, Mforma last week announced the acquisition of FingerTwitch Inc., which ports mobile applications to multiple devices and platforms on both Java and Brew environments.
Efrusy said Accel Partners does not have to exercise a lot of control because it invests in category leaders that tend to be standalone. Those companies do not run as much of a risk of being acquired. Accel has invested in Sonim Technologies, Trapeze, Airgo Networks, Veritas Software, RealNetworks, Macro Media, Motive and iPass.
Some of Accel’s companies have been bought, Efrusy noted, adding that can be good depending on the purchase price. Accel invested in Brightmail, which was acquired by Symantec, and Arrowpoint, which was bought by Cisco Systems Inc. He described both as successful deals.
But he cautioned that VCs should look before they leap. “While the forces of change and growth are strong, that doesn’t mean any great idea or technology will make a grand business,” Efrusy said.
Tercek said consolidation will help streamline the mobile entertainment space filled with thousands of companies that have few titles to market. He said Mforma has 300 titles worldwide running on mobile phones and ported from one device to another.
“I believe we are going to see the big get bigger, and the small will get consolidated,” he said with regard to mobile-content companies.
