Few know the communications industry better than partners of ComVentures, an early-stage venture-capital firm that backed long-distance heavyweight MCI, communications gearmaker Tellabs (TLAB ), and America Online (AOL). Although decreased carrier spending is a concern, Roland Van Der Meer, a partner at Palo Alto (Calif.)-based ComVentures, believes there are still plenty of opportunities to make money in the telecom sector (see "Tailwinds in the Telecom Tempest"). Van Der Meer shared his thoughts about telecom investing with BusinessWeek Online reporter Olga Kharif on June 12. Here are edited excerpts from their conversation:
Q: Is telecommunications one of the worst sectors for an investor to be in right now?
A:Oh, absolutely not. The airline industry, transportation, the automobile industry, consumer goods, durables, retail -- those are cyclical and brutal. Communications is not. Because communications got so over-hyped for a while, everyone thought it was the panacea. But it's a very good industry. You just have to bet long term on it, because you're growing at 10% per year over the long run.
In spite of what just happened and the setbacks -- the valuations in the stock market and all that -- business is growing. The bandwidth needs are growing -- year in, year out. And that will not stop. It hasn't stopped ever in the history of mankind. Now you do have to pick your opportunities and look at valuations, but good companies and good teams will win in this market.
Q: Which telecommunications areas do you think are the most promising?
A:There's a lot to be done in the wireless domain in terms of core infrastructure and using bandwidth more efficiently. And we need to make wireless better. How well does your cell phone work, day in and day out? Pretty badly, I imagine -- dropping calls, not completing them. It has bad service connections. Well, that could be improved, couldn't it? Much also has to be done in the optical domain. And in the enterprise space, there's a lot to be done in terms of how you deal with the data, how you store it, how you manage it, how you're going to let your employees telecommute.
Q: What technologies do you see as the most promising in the wireless field?
A:I think we're going to see a lot more in terms of being able to roam with wireless LANs. They basically let you open up your computer laptop, with this little, unique radio modem built in, and access the Internet wherever you are. I think we'll see data services like that roll out fairly quickly here. The cellular networks can't really afford to do a whole lot of data because they can barely get their voice calls to work. They'll do some data, but limited application data. And more broadband stuff will be done by other services.
Q: What are the most important shifts in the optical field?
A:I think we're going to see a shift in optical components from labor-intensive manufacturing to automated processes. Instead of hand-building them, it will all be done by the machines that have built the semiconductors for ages. That will be what we think will happen in the next few years. And that will revolutionize the whole optical industry.
Q: Where do you see opportunities in today's telecom marketplace for startups?
A:In the systems world, it is a little challenging right now. The big [telecommunications] system manufacturers -- Lucent (LU ), Nortel (NT ), Siemens (SMAWY ), Ericsson (ERICY ), and now Cisco (CSCO ) -- are vying for fewer telecom dollars. And the new companies in this sector would definitely have to fight even harder. So in the system domain, we think it's going to be a tough battle for the startups.
However, we do think all these system manufacturers are waiting for next-generation technology in optical components to help them build their systems. And they would definitely incorporate it if they had the opportunity to get an advantage on their competitor. So we think there are a lot of breakthroughs to be done there in the optical components space and [many possibilities for] investing at this point of time.
Q: Which investments are you holding now, and why?
A:We still think in terms of fundamentals. One example: Universal Access (UAXS ) is a wonderful company. They provide provisioning services for all the carriers across other carriers. They own a database that knows every point of presence of every carrier and how much capacity they have. Universal Access is like the flight guide for the communications industry. And that is a tremendous value to the carriers, and a great model that is growing very nicely.
Edited by Alex Salkever