NEW YORK-The importance of venture capital as a finance source for wireless Web businesses has increased dramatically amid the pullback of equipment vendors, commercial banks and public securities markets.
“It is so painfully obvious that the financing side of the equation has become a major problem for Internet and wireless Web-related telecom companies,” Glenn S. Gerstell, a partner with Milbank, Tweed, Hadley & McCloy L.L.P., Washington, D.C.
“Financing of wireless Web projects will prove more problematic than two years ago when the markets were better disposed. This means that early, realistic business appraisals are much more important.”
The investment community has developed reasonably good criteria for evaluating telecommunications operators and the voice services they provide. These benchmarks are inadequate for analyzing wireless Web and mobile commerce businesses, which must work interdependently with networks.
“The varied projections for Internet use are all over the map. This is understandable and wonderful and leads to creativity, but it also can lead to a lack of appreciation and addressing of market risk. We are in a world of unprecedented uncertainty and fluidity,” he said at the recent Institute for International Research conference on “Financing the Wireless Web.”
The result, at present, is a perception that the degree of risk is unknown but large, and this concern has made many groups of potential investors quite skittish.
“The high-yield (bond) market is dead. The availability of commercial banks to finance the wireless Web is almost nil because they are looking for near certainty of a revenue stream,” Gerstell said.
“Vendor financing remains a key source of debt financing, but they are not interested in subsidized loans or sweetheart deals because they want to offload loans to commercial banks, which are reluctant to finance the wireless Web. … Some big players in vendor financing have recently pulled back from commitments.”
As the result of this vise in which they are caught, wireless Web companies need to convince venture capitalists and other sources of private equity to finance them, he said.
As part of that strategy, they also must engage in the complicated process of obtaining financial commitments from strategic alliances with corporate sponsors: telecommunications operators and Internet service providers; construction and infrastructure companies; marketing and distribution firms; equipment and content providers.
“There is nothing unique about these structuring issues, but they do take on greater complexity. … Building strategic alliances is very important, a threshold consideration. It is more difficult than building an undersea cable or a wireless network,” Gerstell said.
