Winning Against the Grain

12th February 2013

BobGoodmanHot Topics’ David Pringle talks to Bob Goodman, founding partner of Bessemer Venture Partners’ New York office, about his contrarian, yet lucrative, bets on telecoms equipment startups.

For most venture capitalists right now, spectacularly profitable exits are thin on the ground.  That makes the recently agreed sale of Israeli startup Intucell to Cisco for $475 million particularly eye-catching.

Two years ago, Bessemer Venture Partners invested $6 million in Intucell in exchange for a stake of almost 50%. At the time, Intucell had just six employees and no customers.  But it did have clever software that enables a mobile network to self-organise and dynamically adjust to traffic levels.

“Two or three years ago, we saw that, with the rapid take up of smartphones and tablets, that the carriers’ networks were going to get more and more congested,” says Bob Goodman, one of the Bessemer partners that approved the original investment in Intucell, which now has AT&T and other wireless carriers as customers.

By betting on Intucell, Goodman and his colleagues at Bessemer were going against the grain. Conventional wisdom among venture capitalists has been that telecoms software and equipment startups are very high risk because their livelihood depends on slow-moving, awkward carriers geared up to buy from major equipment suppliers, such as Ericsson and Huawei, rather than small companies.

But Bessemer has the financial firepower and the expertise to invest where other VCs fear to tread: About 50 investment professionals manage its current fund of $1.6 billion.  For Bessemer, the wireless networking space has been fertile ground. “We had a roadmap around wireless infrastructure back in the late nineties, which ultimately led to our investment in a company called Flarion, which is probably one of the most innovative companies I have ever been involved in,” says Goodman.  “Flarion created most of the interesting intellectual property around 4G. Ultimately, the company got sold to Qualcomm for close to a $1bn. I think actually we could have run that race a lot further.”

Going around the gatekeepers
Over the past decade, the implosion of some of the major telecoms equipment suppliers, such as Nortel, has further opened up the field for start-ups.  “Back in the late nineties/early 2000s, several major OEMs were doing much of the innovation and were the gatekeeper for getting into carriers,” Goodman recalls. “But over the past 10 years, the large OEMs were financially punished post tech-bubble and then a double financial punishment when the Chinese, notably Huawei, came into play. In a sense, that created a vacuum.”

Rising competition from Internet players providing over-the-top services means that carriers are also becoming more receptive to working with innovative start-ups. “The carriers themselves have said we need to innovate or die. And the innovation is coming from startup companies, so we need to open up on-ramps for smaller companies to work with us. U.S. carriers have done a great job on this. John Donovan has been a genius at building out an on-ramp for innovative start ups at AT&T,” says Goodman. “And I happen to be on the Sprint advisory board: Once a quarter, three or four of us VCs meet with the top officers at Sprint and help to bring innovation to Sprint. Verizon and several other global carriers do similar things.”

Easing the capacity crunch
Facing a chorus of complaints about dropped calls and sluggish data connections in city centres at peak times, carriers are showing a growing appetite for any technology that makes better use of the available bandwidth. Hence the demand for Intucell’s self-organizing network (SON) software, which enables a base station to expand or contract its coverage area in real-time so customers on the edge of a cell are connected to the base station with the most capacity, enabling customers at the centre of the cell to get a stronger signal.

As well we being the only VC to back Intucell, Bessemer has also invested in California-based Vasona Networks. “Vasona will be as interesting as Intucell in what it can do for carriers and solving their problems,” says Goodman. He likens Vasona’s software to a traffic cop managing the flows of traffic across a network. “It is aware of what is happening at the radio edge in real-time…but it is aware also of what is happening in the content. Is it a web session, is it a video session, is it some software being downloaded in the background? It can make real-time decisions about how to manage the resource and how to prioritise the resource,” Goodman says.

Field tests of Vasona’s solution have shown a “tremendous uplift in bandwidth utilization, particularly at the peak time,” according to Goodman. “Intucell was one of the great bets and I think Vasona is also going to be another great bet.”

Vasona’s engineering team is based in Israel – the home of Intucell and the location of Bessemer’s only office in the EMEA region. “Israel as an investment area has proved to be one of the most fertile in the world,” says Goodman. “Because of some of the unique resource constraints that Israelis face, they have to do a lot of out-of-the-box thinking.”

Bessemer also sees opportunities for startups that can help carriers shrink the cost and complexity of their network using new technologies, such as software-defined networking and cloud computing to run more operations on low-cost servers.  Goodman says there is also a lot of interest in replacing dedicated hardware in network nodes with software and in integrating Wi-Fi and small cell technology with the macro mobile networks.

But Goodman and his colleagues are likely to see a step up in competition in the telecoms equipment space: Cisco’s acquisition of Intucell will surely see more VCs invest in wireless network start-ups. “I personally hope they don’t, because I like having the field for Bessemer,” says Goodman.  “But I think they will.”

As wireless data traffic continues to soar, any start-up that can make a significant difference to the capacity crunch faced by mobile operators will be in demand. “We won’t wake up one morning and reverse the laws of physics. The solution to the mobile data crunch is a very complicated cocktail,” says Goodman. “The demand for bandwidth is almost insatiable…the more bandwidth you have, the more it is going to be utilized.”

Bob Goodman will be one of a panel of seasoned TMT investors debating the hottest developments in the mobile industry at Hot Topics Barcelona event on February 25th.