Wireless has been a red-hot area for venture capitalists. Can it keep its luster in 2008?

Despite rumblings that too many companies are getting venture capital (VC) funding, veteran wireless investors say they’re ready to put more of their money on wireless – as long as they’re not also-rans.

For early stage investors, the trick is to find the next big thing before everyone else does. That doesn’t leave a lot of opportunity in some areas, such as mobile advertising or social networking. Still, investors are optimistic they will find new areas this year, whether the solutions end up being enterprise-oriented or just making handsets work better for end-users.

VC Spending Remains Steady

The telecom and semiconductor categories saw fewer deals but more dollars in the third quarter of 2007, according to the most recent Money Tree Report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Financial. Software and biotechnology are the largest categories of VC spending nationwide, while clean tech rose last year to become the third-largest source of VC.

Wiberg: Plenty of capital to go around.

MOVING, NOT LEAVING
Bill Wiberg, a general partner at Advanced Technology Ventures (ATV), is one of those investors studying the clean tech sector – but not to the exclusion of wireless. Before joining ATV in 2003, he spent 19 years at Lucent Technologies, where he was president of the Cellular and PCS Wireless Networks division from 1997 to 2000.

Gone are the network go-go days of the 1990s, but some of the same problems still exist around coverage and capacity, and that’s an area of interest, albeit a challenging one for promising new technologies, he says.

Some VCs have warned that too much capital is going into too many companies, but Wiberg doesn’t share that sentiment. “I don’t feel strongly that’s the environment,” he says. “I think we’re in a pretty good balance.”

Hull: No fading interest in wireless.

The prevailing theory among VCs is plenty of money is chasing wireless deals, and the best entrepreneurs have their choice of VC firms with which they want to work. “Really great start-up teams are always in the driver’s seat,” says John Hull, a managing director at OVP Venture Partners. “They’ll always have 10 guys like me chasing them around.” Like housing, it may be a seller’s market or a buyer’s market, but the house on the corner by the lake will always attract potential buyers ready to pounce.

“I don’t really see any fading of interest in wireless,” Hull says. “There are lots of iterations of venture opportunities around wireless that we haven’t even thought of.”

VCs and consultants agree that software and techniques for making devices easier to use will be driving forces in the future, in part propelled by Apple’s iPhone. The majority of handsets are “feature crowded” as opposed to “feature rich,” says Barry Jaruzelski, a partner in the communications and technology practice at Booz Allen Hamilton. “Obviously, there is still a ways to go on ease of use.”

Jaruzelski: Many of today’s handsets are “feature crowded.”

While AT&T in some circles was criticized for giving up much of its control in the design of the iPhone, what ended up being produced was something not driven by the interests of a carrier, which has its own agenda, but by Apple. “Most phones are not designed by what the average user wants,” he says.

Besides consumer apps, the enterprise is another area grabbing the attention of VCs. “Wireless devices are becoming extensions of the enterprise; it’s no longer just e-mail,” says Ryan Floyd, general partner at Storm Ventures. “There will be lots of good problems to solve there.”

ALL ABOUT TIMING
Early stage investors say they are shying away from some areas, such as mobile social networking. Even though its best days probably are ahead, it’s not clear that an early stage startup would be able to form now and take the industry by storm. Many startups in mobile social networking already launched in the past 24 months, and big social networking companies are pursuing their own mobile strategies, Wiberg notes.

VC Spending by Quarter (click image to enlarge)

Mobile advertising is another hot area, and one that Wiberg about two years ago predicted would be one of experimentation and figuring out which models will work. He probably could say the same thing today and it would apply just as much. “My time scale continues to push out,” he says. “In 2008, we will be experimenting. We haven’t coalesced as an industry… It’s not that different from LBS,” an industry in which he’s been a believer since the late 1990s and one that finally is catching up to the optimism.

Bussgang: Can’t underestimate carriers’ grip.

Another early-stage investor, Storm Ventures made a bet two years ago in Ad Infuse. But it would be difficult to back a new company in the mobile advertising space today, Floyd says. “We’re probably going to be thoughtful about where we choose to invest,” he says. “I do think there are opportunities for new investments.”

Some VCs say they’re sensitive about business models that are dependent on carriers. On the other hand, they’re also reluctant to back companies that don’t take the carrier’s profit concerns into consideration. It’s a bit of a quandary. It’s not easy for a startup to get a deal with a carrier, most of which are bombarded with hundreds of companies hawking their goods. On the flip side, it’s not easy to generate a lot of activity or revenue without working with a carrier.

Dalton: Realistically, money will be lost.

That conundrum might slowly change as operators begin to refine their “open access” strategies, thereby allowing more apps to be discovered. But “it’s been very closed to date and I think VCs underestimated the stranglehold the carriers had on the market,” says Jeff Bussgang, a general partner at IDG Ventures Boston.

REAL WORLD
A sense of realism that wasn’t there in the late 1990s exists in today’s VC world, investors say. “There will be a lot of money lost, just to be clear,” says Sean Dalton, a managing general partner at Highland Capital Partners. Dalton, a former Internet services product manager for GTE, says his firm makes a point of trying to find out what carriers need by meeting regularly with executives and engineers. If need be, the investment firm can influence the direction of a portfolio company. “It’s a 2-way street” with the carriers, he says.

Abbott: Expects a “rationalization,” not a bubble.

What’s different from the previous bubbles of the Internet and optical equipment is people are buying wireless voice and data services. “Now the trick is how to mobilize content and help carriers monetize it,” Dalton says. “I don’t think it’s any more complicated than balancing those desires.”

Given the previous bubble bursts, perhaps it’s only natural for wireless industry veterans to question whether another bubble is in the offing. But “bubble” may be too strong a term, says Robert Abbott, general partner with Norwest Venture Partners. “I think there will be some rationalization that comes into the marketplace, and there have been a lot of companies funded and they can’t all be successful.”

Abbott knocks on wood that some of Norwest’s investments, such as deCarta, mBlox and Mozes, appear to be on the mark. Concerns rise when too many companies get funded in the same sector; then, it’s hard for anyone to make money. And whether they work directly with the carriers or without, making money is what it’s all about.