Venture capitalists have pumped oodles of money in recent years into startups that exploit telecom networks and wireless infrastructure, but now it might be time for infrastructure startups themselves to start attracting more funding, according to industry watcher Ovum.
Ovum reports that VC funding of telecom infrastructure startups has fallen from $796 million in 2009 to about a third of that over the period of Q3 2011-Q2 2012, while money has poured into mobile, social and over-the-top (of wireless network) startups and overall venture funding has increased as well. Citing data from the recent PWC/NVCA MoneyTree Report, Ovum points out that the networking and equipment share of total VC investments shrank to just 1% for the past four quarters (Q3 2011-Q2 2012), down from about 10% in 2003.
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But Ovum Principal Analyst Matt Walker says carriers and enterprises need to keep bolstering their networks to support all the new software and services, and without an infusion of fresh infrastructure companies, they will become beholden to a dwindling number of powerful players (the Ciscos and Huaweis of the world). Recent IPO activity (Nimble Storage, for example) and M&A transactions in the infrastructure market, including VMware's $1.26 billion buyout of software-defined networking player Nicira, could be indicators that investments in such infrastructure companies can pay off for VCs.
"With a weak start-up pipeline, the [telecom] industry relies more on incumbent vendors to generate new ideas and products. Their budgets are bigger, but VCs are often better at funding 'game changing' ideas ignored by established vendors," Walker says in a statement. "Incumbent vendors' internal R&D budgets are now nearly 90 times larger than VC investments in the sector, up from 30 times two years ago. This narrows options for service providers, who rely on both large and small vendors for innovation. The big vendors also need access to the start-up pipeline, to fill in gaps in their own portfolios through partnership and M&A."
Ovum notes that service providers themselves are getting more active in seeding startups, citing Deutsche Telekom's move earlier this month to revamp its T-Venture unit.
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