Telcos go after venture capital

When Montreal’s Wavesat Telecom recently put out feelers to attract private investment, the broadband wireless company lucked out by garnering the attention of Skypoint Capital Corp. Lead by the Kanata, Ont. venture capital firm, Wavesat used its technology to lure more than $10 million in private equity from a variety of companies, including a syndicate of Taiwanese investors.

“(Wavesat) has this OFDM (Orthogonal Frequency Division Multiplexing) technology which is allowing wireless communications to occur in less than ideal conditions. We think there’s a good growing market for that capability,” Andrew Katz, Skypoint’s president, said in explaining his firm’s investment in Wavesat.

It should also be noted, though, that Wavesat, like many telecommunications firms these days, is reaping the harvest of being in a hot sector in the eyes of the venture capitalists. Investment in the communications industry almost doubled in 1999 over the previous year, totalling close to half a billion dollars in financings and investment, according to the Canadian Venture Capital Association (CVCA).

“There’s a huge pool of capital today for the right companies and I believe it’s continuing to grow,” said Katz. “If you’re a Canadian company the opportunities are getting better, there’s much more U.S. money coming into the market.”

According to Katz, Skypoint is one of two or three venture capital firms in Canada who focus exclusively on the telecommunications industry. “I think telecom is the right place to be in terms of offering the best forward opportunity to make money,” Katz explained.

But Katz’s company is not the only firm that feels that way, according to John Eckert, president of the CVCA and a managing partner with McLean Watson Capital, a venture capital firm in Toronto.

Eckert said that almost every venture capital firm these days is looking to invest in telecommunications, some enticed by the prospect of quick cash.

“Typically, telco companies represent larger market opportunities,” Eckert explained. “If they have leading technology they have the opportunity to be rapidly adopted and to grow big very, very quickly.

“As a result, we’ve seen some companies get bought very early on for huge amounts of money,” which trickles down to the company’s investors.

Katz said the pay-off is even more lucrative if the telecommunications company develops a broad enough product-set to go public.

The downside, of course, is that the company is neither bought out nor goes public – it just flops. But that doesn’t seem to be deterring investors, who are looking for the next big breakthrough technology.

Katz said his company has investments in all types of telecom companies, from broadband wireless to fibre to cable companies – all trying to solve the bandwidth bottlenecks.

“It goes without saying the technology has to have the potential to dramatically change the industry, so we’re not looking for marginal improvement,” Katz said.

However, though the interest in telecom technology continues to explode, private investment in telecom service providers is rapidly decreasing, according to Johanne Lemay, a partner with Lemay-Yates Associates of Montreal, a company that recently released a study of Canada’s CLEC industry.

“Right now, the situation for financing is very difficult,” Lemay said. “It’s much different than the financing environment CLECs faced a couple of years ago or even a year ago.”

Lemay said that many investors seem wary of CLECs as growth rates in that industry have not been as high as many had forecasted, mostly due to the price war CLECs and ILECs have been engaging in to attract new customers.

“I think we will see some CLECs disappear, or some proposed CLECs disappear,” she said. “And we might see a wave of consolidation in the CLEC industry caused by these financing difficulties.”

Eckert said this same tightening of the market will eventually begin to hit telecom technology companies as well.

“My sense is as follows,” he said. “It’s a very hot sector today but generally what happens is the spotlight shifts, and when the spotlight does shift the sector will not have the attention that it has enjoyed and money will be harder to come by. Everybody has been backing telecom companies, (but) it’s a cruel world, not everybody’s going to make it.

“When it’s hot, a lot of interest is paid, a lot of money flows, and then people wake up to the fact that the valuations…have run ahead of the actual opportunities and then things come back in line. And at that point there’s a shakeout and the same thing will hold true in the telecommunications sector.”

It’s at that point that telecom companies will have to be prepared to be judged solely on the viability of their business plan, not by the area they’re working in, he added.

“Addressing an area that is very sexy today is critical to getting attention,” Eckert said. “But in order for that company to achieve first-round, second-round, third-round financings they’re going to have to develop themselves as true businesses with all of the business functions addressed. And that means more than just a strong engineering team…they need management leadership.”