One of the ways I search for investments is through the lens of a “roadmap.” A roadmap is typically a set of criteria for companies in a sector that might be attractive for investment. We start with a belief about a major trend or transformation taking place in the world and use that belief to identify categories of companies that stand to benefit. We then narrow the list further by creating criteria to look for in a potential investment in one those companies.
At Bessemer, we each focus on several roadmap areas at once. I call one of mine the “mobile data crunch.” I alluded to this roadmap in my last post about Intucell. Today, I’m going to give you a glimpse of our thinking in this area and give an abridged example of what a roadmap could look like.
Here’s my high level belief: mobile data traffic, driven by the smartphone adoption, is exploding faster than carriers can expand capacity. If you look at the trends, global mobile data traffic will increase by 26x between 2010 and 2015, of which nearly 2/3 will be related to mobile video. Cisco has done some of the most widely cited research in this space:
Cisco Forecasts 6.3 Exabytes per Month of Mobile Data Traffic by 2015
Mobile Video Will Generate 66 Percent of Mobile Data Traffic by 2015
To keep up with this demand, carriers have had to undertake very expensive capacity expansion projects and have so far been unable to increase ARPUs in line with this growth. Even with massive amounts of new investment, networks won’t be able to satisfy the anticipated increases in demand. There is a need for services to help carriers both add new capacity and optimize existing resources. Many categories of companies seek to scratch this itch, including video compression technologies, CDNs, network optimization tools, wireless backhaul technology, other types of network hardware and more.
So what are the barriers to investing in this space?
- Long sales cycle at carriers. Carriers (especially the Tier Is) are notoriously protective of their networks and test new products in their labs for months before trialing them in a live network setting. For a start-up, this means slower revenue and more burn.
- Capital intensity of building carrier-grade network infrastructure. Carrier-grade products are held to a higher standard of quality than, for instance, consumer websites which enjoy more customer tolerance of bugs and downtime. Getting it right requires a longer development times and resources.
- Technology risk. Will this technology work at scale (or at all)? Will it be leapfrogged by an alternative approach?
Given the characteristics of this market, an attractive investment may look something like this:
- Helps carriers increase capacity. This is the core of the thesis and provides real value customers will pay for. Addressing the mobile video pain point specifically is a bonus.
- Product is primarily software-based rather than hardware-based. This results in a less capital intensive model and reduces the time it takes to be evaluated and implemented in a carrier’s network.
- Company has at least one live network implementation. A live implementation reduces the technology risk, as there is a strong customer validation of the approach. It also provides a major advantage for product development-- most start-ups don’t have this level access to a live network in order to test and improve their product.
- Company has other features which make it capital efficient and quicker to sell to carriers.
These criteria may be a simplification of what we look for, but hopefully they are illustrative of the roadmap approach. At the end of the day, we break our own rules all the time for exciting teams and companies that don’t fit neatly into any one box. We’re still looking for additional investments along this roadmap, so please contact me if you think you might be a good fit.