VC cash flowing to apps rather than telco networks: Report

Venture capital firms are too focused on funding “network users” such as mobile apps rather than the networks themselves, according to a new report.

Since the global financial crisis, VCs have been pouring much of their cash into mobile, social and OTT start-ups, according to technology analyst firm Ovum, showing less interest in telecom.

Ovum claims support for telecom infrastructure start-ups fell from US$796 million in 2009 to just US$270 million between the third quarter of 2011 and the second quarter of 2012.

While VC support for network infrastructure has declined, overall investments grew from US$20.1 billion in 2009 to US$27.8 billion in the four quarters ending second quarter 2012.

Some of the beneficiaries of this surge include Facebook, Groupon, Twitter, Square and Spotify.

According to Ovum principal analyst Matt Walker, a “funding disconnect” has emerged between network builders and network users.

“Lots of innovation and venture capital is targeting the network users, such as mobile apps and OTT platforms. However, little of it is directly helping the network builders,” Walker says.

“With a weak start-up pipeline, the industry relies more on incumbent vendors to generate new ideas and products.”

In a new report, titled Networking Start-ups Overdue for VC Rebound, Ovum states recent IPO and M&A transactions “point to a rebound in VC interest in network infrastructure”.

This could be due to the fact that service providers are getting more involved in funding and working with start-ups.

The likes of Telefonica, Vodafone and Verizon are now funding start-ups directly, which, according to Walker, is not surprising.

“With the recent VC drought in networking, it’s not surprising that big telcos have become more directly involved in funding start-ups,” he says.

For example, VMware recently acquired Palo Alto-based start-up Nicira Networks for US$1.26 billion.

But that’s not to say mobile and social start-ups are no longer on the radar. On the contrary, Silicon Valley-based accelerator Tandem invests exclusively in mobile start-ups.

Tandem is encouraging start-ups based outside of the United States to apply for its next round. Applications close on October 1.

Co-founder Doug Renert told PandoDaily start-ups are required to come to Silicon Valley for six months.

“We like pursuing large markets ripe for disruption, but the team is by far the most important factor we consider when evaluating opportunities,” the website says.

“We look for entrepreneurs with imagination, persistence and a knack for building great products. If this describes you, then your business could be our next investment.”

In the future, Renert expects roughly 50% of Tandem’s participating companies will be born outside of the US.