Tag Archives: finance

Hard deadline for money beats soft promise of broadband investment

by Steve Blum • , , , ,

No. You show yours first.

By a four to one vote, the California Public Utilities Commission approved a $1.5 million grant to build a fiber to the home project in Nicasio, a wealthy community in western Marin County. As has become common, commission president Michael Picker cast the only no vote. The grant from the California Advanced Services Fund (CASF) covers 60% of construction costs; the remaining 40% will be raised locally

The required matching funds plus costs of offering will be obtained by a notes offering, which will be registered with the California Department of Business Oversight under the Securities & Exchange Commission’s standardized process, the Small Company Offering Registration (SCOR) process. The homeowners in the project area will be offered an opportunity to purchase the notes. The interest rate will be based on market conditions. Currently, the applicant is proposing an interest rate of 3% per year…

Originally, the applicant had planned to offer the Broadband Utility Note securities under the Intra- state offering exemption of the Securities Act of 1933; however, after consultation, the applicant’s legal advisor advised them that for the Nicasio project, a SCOR offering would be a better alternative.

Inyo Networks and Praxis – the same companies that are behind the Digital 395 project – have a year to sell enough bonds to build the project. From the commission’s point of view, this leeway is a departure from previous procedures, which, in theory, required CASF grant applicants to have their matching funds in place.

In reality, it’s laying the financial cards face up on the table. In the past, applicants have put together financing and other deals in advance only to see them evaporate due to processing delays at the commission – rules call for decisions to be made in 106 days, while actual wait times can stretch to well over a year. And then there are the cases where the money is said to be available, but the details are, um, murky. Sorting that out can tie up CASF money for years as well.

It would be best if the commission met its own deadlines and made decisions quickly enough to hold business models together and keep investors from walking away in frustration. But having the 60% in hand and a hard deadline of a year will make it easier for Inyo to raise the rest and will give the commission the transparency and accountability it needs to run the program more efficiently. It’s an improvement and should be standard practice.

Innovative bond financing proposed for Marin FTTH project

by Steve Blum • , , ,

A fiber to the home project for 216 residences in the Marin County community of Nicasio will be partially funded by a selling bonds to investors, if everything works out as planned. The first step is up to the California Public Utilities Commission, which will be considering a $1.5 million grant from the California Advanced Services Fund to pay for 60% of the cost. The remaining 40% will be raised via a type of simplified private bond offering to financially qualified individuals and organisations that’s allowed by California law.

The draft resolution in front of the commission now would give the applicant, Inyo Networks, six months to raise the money. It describes the financing vehicle as “innovative” and notes that “if successful, this funding mechanism could become a viable alternative for others to follow”.

In a joint reply, Inyo Networks and the Nicasio Land Owners Association ask for a year to get it done and position it as an otherwise ordinary transaction…

This mechanism has been in place for some time and has repeatedly been used by start-ups throughout the state. What is innovative is that it has not yet been applied to community infrastructure in California — specifically broadband — and in that regard has considerable promise for communities to self-invest to close the digital divide. In the future, this might be the only self-funding mechanism for communities.

The project area (but presumably not the grant funding) includes George Lucas’ Skywalker Ranch, which means a couple of things. First, there’s middle mile connectivity – Zayo Networks has a 288-strand fiber line serving the ranch – and second, it might not be too difficult to find qualified local investors with sufficient interest and cash to buy the bonds.

Gigabit Seattle raising FTTH attention but not cash

Adding lift to a trial balloon.

The Gigabit Seattle team is trying to tap into Google Fiber’s buzz by releasing a fiber-to-the-home pricing plan that sounds a lot like what’s on offer in Kansas City, albeit for a few dollars more and with a little less freebie time. Otherwise, there’s been precious little in the way of specific information about the project since it was announced six months ago.

What I wrote then is true today: Gigabit Seattle’s financial vehicle is still a concept car. Zero private sector investors or lenders have been announced, and actual public sector contributions are minuscule.

Service is supposed to begin somewhere in Seattle “in early 2014”. The roadmap outlined in December had the project starting out in a dozen demonstration neighborhoods. No particular construction timetable has been set, even though engineering work was supposed to be well along by now. The latest announcement said that the project team will let residents know next month how they can sign up. Previously, they said that they’ll prioritise neighborhoods on the basis of pre-commitments, again similar to Google Fiber, with a 15% take rate being mentioned as a threshold for moving ahead in a given area.

It’s also unclear exactly who will be building, owning and operating Gigabit Seattle. The company behind it – Gigabit Squared – now describes itself as a “a digital economic development corporation specializing in the planning, implementation and rollout of IT-enabled infrastructure in core markets”. Not a telecoms company, in other words.

Although Gigabit Squared’s CEO says it will own its own projects, it doesn’t have any track record or significant, visible assets yet. Judging by the few financial details discussed so far, it doesn’t have a firm grasp on how much it costs to build an urban FTTH system and the operational telecoms experience of its principals appears slim.

Gigabit Seattle might be able to evoke Google’s business model in a press release, but it’s still a long way from raising the money to pay for it.

Winners and head scratchers at LaunchFest pitch night

by Steve Blum • , ,

Party until you invest.

I counted eight start-up companies at tonight's Digital Hollywood Launchfest, held in conjunction with CES.

There might have been more. It was hard to tell exactly how many hopefuls were looking to impress a panel of angel investors. By the time I got there, the event was more party than anything else. But the music and investor pitches made for a good mix at Planet Hollywood.

Raw Porter aims to put money in the pocket of amateur paparazzi. It's an online photo agency. If you get a juicy picture or video, you upload it and wait for the offers to come in. Editors can also post requests, and if you're in the neighborhood, you just grab your camera and go.

“We know sensational sells,” said Kevin Davis, one of the three co-founders. They take 20% of anything you make over $200. Less than that, and the service is free.

Universal Broadband Communications was showing its Black Box network service, which provides online educational content to schools, and then bridges the gap to home by providing tablets and free access to course materials and student performance data. It's not really an investment play – they're relying on grant funding to pay the bills. But so far, so good.

Other contenders included…

  • Amicroe Touchtab, a $100 retail tablet,
  • Liquid Helium, an online service that automatically turns long online articles into short digests,
  • The Craze, an IPTV box,
  • Scayl, an email platform that lets you send big files,
  • Social media monthly, a consumer magazine for people who want to read about social media.

And Montaro, which has an interesting twist on a low cost telepresence robot. But more on them later.


Electric skateboard wins investor pitch crown at CES

by Steve Blum • , ,

Made in Modesto.

CES's first start-up beauty pageant tiara went to ZBoard this afternoon. The Modesto, California based electric skateboard manufacturer was declared the winner of the inaugural Showstoppers Launch.It competition, which has been designated the official investor pitch event of CES.

Eight companies competed for the blessing of a panel of five experienced early stage investors, led by tech guru Guy Kawasaki.

The four minute presentations ranged from crisp to baffling. My favorite quote of the day came from a guy who struggling to explain exactly what his company did. He said he had no competition and wasn't filling any existing need. In fact, he said, his product has been “validated by European experts that it doesn't exist.”

A medical products company, Darma Innovations, came in second and an affinity group marketing play called Troop ID finished third.

There was no money on the table, but ZBoard will get some marketing and PR help. Prizes include public relations counseling, web promotion and a free spot at tomorrow night's Showstoppers showcase event.

Fundability was the primary criterion that the judges considered. ZBoard has working products, a simple selling proposition and an eight week backlog of orders. Which counts for a lot.

The core product is a skateboard with an electric motor that runs off a battery and can be controlled – accelerated and slowed – by leaning forward and back. It has a top speed of 17 miles an hour and, depending on the model, a range of up to ten miles. Pricing ranges from $650 to $950.

Not hot in 2013: mobile payments

“Mobile payments is like waiting for Godot,” said Omar Javaid, managing director of BBO Global, speaking at a recent What’s Hot (and What’s Not) in Mobility 2012 forum in Mountain View. “Every year is the year of NFC but it never happens.” The problem, he says, is that processing payments is a system play. It’s a space that’s controlled by a few big players and they’re not very interested.

Quinn Li, managing director of Qualcomm Ventures, agreed. He made the point everyone is trying to get a piece of the mobile payment value chain, but in order to it you first need to get everyone else in the chain to agree and then you need to handle a lot of transactions quickly. “Payments is a pennies business and you need scale,” he said.

But even if start ups find it difficult to take a penny or two, the fact that the transaction is happening at all creates an opening. Scott Raney, a partner at Redpoint Ventures, said he’s encouraging entrepreneurs to find ways to add value to mobile transactions rather than trying to handle the payments.

Creating loyalty programs on mobile devices is one example. Consumers will still carry around a few credit cards, but they won’t put up with the clutter of cards and keychain tags for every store in the mall. Javaid pointed to Apple’s Passbook iOS app as proof of concept, saying he wouldn’t use it as a substitute for his Amex card but it’s handy for Walgreens or Starbucks plastic.

It’s an end run opportunity: mobile apps, or even devices, become integral to transactions, but outside of the secure boundaries guarded by banks, credit card processors and the other behemoths of the financial world.

The What’s Hot (and What’s Not) forum is an annual event organized by the Wireless Communications Alliance. This year’s event took place on 14 November 2012 at the Fenwick & West law offices.

San Leandro beats Google’s Kansas City broadband speeds

Press release from the City of San Leandro:

San Leandro, Not Google, Is Writing The Next Chapter Of The Internet

Source: Lit San Leandro

“As Google attempts to grab the headlines with its announcement tomorrow of a fiber initiative for Kansas City that will offer users connection speeds of up to 1 gigabit per second, Mayor Stephen Cassidy of San Leandro announced that San Leandro is staking its claim as the fastest city in the nation. San Leandro’s fiber loop, known as Lit San Leandro, became operational earlier this year, offering connection speeds of up to 10 gigabits per second. This is 2,000 times faster than the average U.S. connection and ten times faster than the Google fiber network planned for Kansas City. Moreover, the network will soon support ramping up the connectivity to 100 gigabits per second for businesses needing an even greater connection.”

Less than a year after the City Council approved the project, Lit San Leandro is delivering on its promise of providing fast, fiber optic broadband connections to local businesses.

More information about the partnership with Lit San Leandro is available here. Tellus Venture Associates assisted the City in negotiating and implementing the agreement with Lit San Leandro, and is currently completing a strategic commercial broadband plan for consideration by the city council.

User-financed FTTP fails in a competitive market

Palo Alto user financed FTTP study

A user-financed, municipal fiber-to-the-premises broadband system would be a financial nightmare if launched into a market with mainstream competition, even if it’s subsidized and supported by a profitable city-owned utility.

That’s the finding of a study presented to the City of Palo Alto’s Utility Advisory Commission last night by Tellus Venture Associates. The report assessed the financial potential of user-financed municipal FTTP options, including upfront payments ranging from $1,000 to $5,000, substantial capital contributions by the City and ongoing subsidies of up to $2,000,000 per year.

In a user-financed model, property owners may opt to pay a share of the cost of hooking up to a municipal fiber network, or refuse and remain unconnected.

Very little construction cost savings can be realized by avoiding building lines to uninterested households. A telecommunications network has to be contiguous and a municipal-scale network costs about the same to build whether it serves many homes or just a few.

Upfront fees in the thousands of dollars range proved to be an insurmountable obstacle in a market like Palo Alto that already has two major service providers – AT&T and Comcast – that do an adequate job of meeting the needs and expectations of the majority of residents.

The City’s market research (conducted by RKS Research and Consulting) indicated that less than 10% of residents would be interested in paying $3,000 to connect to a fiber optic broadband network, even if ongoing Internet service was free. When a monthly service fee was included, interest dropped to less than 5%.

Tellus Venture Associates’ modeling showed that even under theoretically perfect conditions, a 24% take rate would be needed to fully pay the cost of construction, and two to three times that many subscribers would be required in any plausible real-world scenario. Even when operating surpluses and tens of millions of dollars in City subsidies were added in, full payback was not possible except in a handful of scenarios where optimistic assumptions were made about initial subscription rates, continuos growth over twenty years and virtually no competitive response from incumbents.

The study concluded that “a fully user-financed citywide fiber-to-the-premise system is not possible to achieve” in a competitive market such as Palo Alto. It could “be built using a combination of upfront user fees and City financing, but there is very little probability of the debt incurred being repaid through operations. Ongoing subsidies would be required”.

The full report is available here, and the accompanying presentation is available here.

Palo Alto user-financed FTTP study

Palo Alto user-financed FTTP study, 6 June 2012

Palo Alto user-financed FTTP presentation, 6 June 2012

User-financed FTTP presentation to City of Palo Alto UAC, 6 June 2012


San Leandro joins elite group of dark fiber cities

Source: Lit San Leandro

Lit San Leandro is putting fiber in the ground. A launch party attracted about a hundred out-of-town development prospects and local business people who heard about the project’s big picture benefits and the specific real estate opportunities it creates. The Hayward Daily Review and San Leandro Patch have good articles on the event. Patrick Kennedy’s Lit San Leandro blog also has good updates and pictures.
Speakers at the event included Sean Tario, the CEO of Open Spectrum Inc., a data center consultancy, Jeremy Neuner, the founder of NextSpace and Justin Reilly, a partner at Cassidy Turley commercial real estate.
This makes three Bay Area cities with municipal dark fiber networks: Palo Alto, Santa Clara and San Leandro. Palo Alto’s is a 41 mile network with about 60 primary customers, and many more secondary users buying lit service from the primaries. Santa Clara has 57 miles of dark fiber, a couple dozen primary customers (the biggest group being major data centers) and many more secondary users.

Lit San Leandro is a private venture with full City backing to build an 11-mile dark fiber loop through commercial and industrial districts. The City is contributing conduit access for 99%-plus of the route. Patrick Kennedy, a local entrepreneur and owner of OSI Soft, a major local software company, is installing the fiber and will run the system on a cooperative basis.

An interconnect to BART’s fiber network is already operational, and several other metro and long haul fiber networks either cross or are within easy reach of the Lit San Leandro system. Low cost, high capacity connections to Tier 1 Internet facilities combined with a large inventory of industrial and commercial properties is expected to attract data centers and other high technology, broadband-intensive businesses.

Tellus Venture Associates advised the City of San Leandro on the project and handled contract negotiations with OSI Soft. The City of Palo Alto is also one of our clients. More information on Lit San Leandro (including contracts), Palo Alto and others is here.

Confronting the killing ground

Start up companies looking for traditional “A” round financing in the $4 to $8 million dollar range will be left to die over the next 18 months. In fact, the financial killing ground will stretch from the $1 million level up to, and perhaps past, the $10 million range.

That was my take away from yesterday’s small business symposium sponsored by Cisco and the Telecommunications Industry Association. One of the highlights (from an information perspective, anyway) was a panel discussion with three venture capitalists (Ajay Chopra, Trinity Ventures, Michel Wendell, Nexit Ventures, Eric Zimits, Granite Ventures), and moderated by Dean Takahashi of VentureBeat.

Companies that VCs will consider in the current climate were characterized as “highly capital efficient”, “don’t need a market” for the next year or two and have a “low burn rate.” Companies that already have revenue in the seven to low eight figure range will also get a look, but at a deep discount. Really deep. Like valuations of 1 to 2 times annual revenue. Maybe less.

This second category isn’t really start up territory. In a kinder economy, these are companies that would first try a bank for financing. Now, it’s an opportunity for VCs and others with cash on hand to scoop up some bargains by stepping into the void created by the collapse of the financial industry. The first category isn’t the traditional feeding ground for VCs either. It’s usually where angel investors tread.

If a small, proven, technically-oriented team has a an innovative, useful and patentable idea in a hot field, and they’re willing to spend the next couple of years in a garage developing it, they might have a chance of getting funding from these guys. That’s a lot of “ifs” to get through. And there won’t be any money for marketing, production, operations or any other cash burning activities that go into launching a new venture.

These development ventures will end up as intellectual property assets in someone else’s portfolio if they can’t quickly raise a few million bucks when the economy thaws. But that’s a problem for later. Better to move ahead with what’s possible now and position yourself for the future, than to just wait for a world more to your liking. It could be a long wait.

The ventures that will really feel the pain over the next year or two will be those that need launch money now. Typically, those are companies with product prototypes and a launch schedule. They need a handful of marketing, sales, administrative, financial, production and operations people. These folks are paid largely in cash and benefits, rather than huge stock grants, and need office space too. On the production side, it’s time for QA, tooling, alpha and beta runs, and dozens more of the steps needed to go from a working prototype to a shrink wrapped SKU.

Most companies at this stage have already begun to incur this overhead, paying for it out of the money left over from the angel round and on credit lines secured with personal guarantees from the founders. They’re walking the killing ground with a leaky canteen, expecting to find water along the way.

Traditional sources, such as VCs, won’t be there. If turning back is an option, that might be the smartest choice. But frequently it’s not an option. Prototypes have a limited shelf life, firing people and closing facilities costs money, and creditors won’t be in a patient or forgiving mood.

A couple of good ideas came out of the roundtable discussion that closed the symposium. Battle scarred veterans shared war stories with first time entrepreneurs, in the most valuable session of the day. There’s no magic source of money. But there are possibilities, such as prospective customers who can gain a competitive advantage by adopting a technology early and on very favorable terms. Strategic investors, who might want access to the knowledge and talent of the team, as well as the technology itself, are another potential source.

But if a sure source of money can’t be found, the veterans say to pull the plug quickly. As they learned from hard, personal experience, waiting until a venture has completely collapsed and decomposed is extremely expensive. Personal guarantees have to be met, and even if those can be washed away in bankruptcy, losing effectively all personal wealth and credit will set an entrepreneur back for years. A swift, clean break, though, can leave an entrepreneur with enough resources and credibility to give it another go, with a structure more suited to the times.