Kevin Fong: Investing hot spots exist in tough climate

Pondering which technology sectors will be most promising for venture investors is particularly difficult to do this year, given the economic environment and the fact that venture companies are investing fewer dollars in start-ups than they were a few years ago. Despite the tough climate, here are some areas that are ripe for venture investment this year.

Personal communications is an investment area with a high growth potential. Computing and telephony have been set free from the desktop and are now mobile. Now we need more companies that make personal communications equipment, infrastructure software, applications and components. Some investments by my firm, Mayfield, in this area include MobileAria Inc., which makes voice-enabled productivity services for use in cars; BeVocal Inc., a voice platform and applications company; and Voxeo Corp., an integrated voice services provider.

Enterprise products that can help companies reduce costs should do well even though overall corporate spending is down. But the hurdle rate for a sale will be very high. Managers will largely be looking at products that have a three- to six-month payback.

Data storage is another investment bright spot. Data continues to be created at unprecedented rates and must be available to an ever-increasing number of constituencies, both inside and outside the company. Products and services that help companies realize revenue and competitive advantage from this will do well.

Voice over IP, because it cuts costs, also might turn out to be a bright spot, but that depends on how quickly it is deployed in applications. Mayfield has invested in voice service companies such as Convedia Corp., which makes media servers; and Sylantro Systems Corp., an applications-enabled softswitch vendor.

Optical equipment, optical components and network equipment are sectors that have fallen off and won’t recover substantially in the next 12 months. However, there is good reason for hope: in the next two years the promise of fibre-optic networks should be realized. While the failures of Global Crossing Holdings Ltd. and even Enron Corp. have, to some extent, cast a shadow over the telecommunications industry, the more systemic problem is that of too much capital spending and too little revenue for carriers and service providers. Overall, anyone selling to these companies will have a tough time at least until 2003, when I expect excess capacity will finally have been worked out of the system.

For network managers, cost reduction is a big issue right now. Whether it comes down to more cost-effective storage, using voice services to cut the cost of customer service, or providing a lower-cost way to handle all the traffic on the network that personal communication generates, companies of interest to network managers this year will be those that can address the cost issue effectively.

Fong is a managing general partner with Mayfield, a venture capital firm in Menlo Park, Calif. He can be reached at [email protected]

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