Editor’s Note: This is one of a series of stories examining the current economic downturn and how it affects the wireless industry. For more on this topic, visit RCRWireless.com/ Economic Downturn.
The thought of pouring money into baby tech firms is likely to induce post-traumatic stress disorder in casual traders who suffered through the burst of the dot-com bubble a few years ago. But in an era that has seen some of Wall Street’s most respected financial institutions buckle like props on a “Godzilla” set, wagering on software developers – particularly developers of mobile applications – actually may be a pretty safe play.
The financial crisis is affecting nearly every industry in the United States, of course, and the country’s best economists seem to have little idea when the tremors will stop or what the landscape will look like when they do. The headlines have been so bleak, in fact, that SeaPoint Ventures Managing Partner Tom Huseby recently got a call from his 84-year-old mom making sure everything was OK on the venture-capital front.
“I was so busy at the time I hardly thought about it,” said Huseby, whose firm has backed such success stories as SnapIn (which recently sold to Nuance Communications Inc. for $180 million), Qpass (picked up by Amdocs in 2006 for $275 million) and Tegic (acquired by AOL for an undisclosed sum in 1999). “I said, ‘Oh, wait, don’t worry about me.’ Who would have ever thought that investing in early-stage software companies could have been one of the safest things you could do.”
Which isn’t to say that the countless startups in mobile are somehow immune to the downturn in the financial markets, Huseby was quick to add. Belts are already tightening, investors are sure to keep a closer eye on the companies in their portfolios, and prolonged tumult on Wall Street could spur some deep-pocketed players to put their money in rock-solid alternatives that may not offer the potential rewards of a startup.
But unlike many other companies, software developers generally aren’t debt-dependent businesses, Huseby explained. Carriers must borrow to build out their networks, for instance, leaving them subject to the same credit markets that are in such disarray today, while software startups can simply sell shares of their business in exchange for investment capital.
And while there’s always the possibility of a “run” on banks or other financial institutions, VC firms face no such risk. Investors typically sign contracts of eight to 10 years or longer, obligating them to pony up a portion of their overall commitment whenever the firm issues a capital call. The penalties for missing that call – and violating the contract – are so severe that only the most foolhardy or desperate investor would allow it to happen.
“What happened in the earlier phase (when the bubble burst) is that there were some individuals – as opposed to institutions – who got into it as an asset class” such as stocks, bonds or real estate, said Chip Austin of i-Hatch Ventures, a New York-based firm that backed M:Metrics and whose current portfolio includes Thumbplay, Limelife and Skydeck. “They were not really understanding what they were doing, and some of them defaulted on their capital calls. What happens then is that you pretty much kind of get wiped out. It’s really a debilitating thing.”
So while the U.S. financial markets may be going through a meltdown of Biblical proportions, wireless startups that have yet to turn a profit don’t necessarily have much reason to press the panic button – unless they have yet to receive their first round of funding. Players that already have solid relationships with investors are reasonably safe, as long as they continue to show promise. But going hat-in-hand to venture capitalists is probably an exercise in futility for those looking for first-time funding in these turbulent days.
“Right now, in this environment, even if you’ve got a great idea you’d better not expect to get funding,” Huseby warned. “You had better try to execute on that idea at your kitchen table for a while, write some code, do a prototype. If you’ve already got a prototype, do a field trial with friends and family, and get some real traction before you try to get funding.
“Most investors are going to want to see some progress. We don’t mind connecting the dots, but it’s kind of hard when there’s not a first dot.”
