Tag Archives: venture capital

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.

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.

Skating through nuclear winter

The mood was grim, taken at face value, at the Wireless Communication Alliance’s annual Venture Capital panel, held in conjunction with the Wireless Communication Association’s symposium, in San Jose on Wednesday, 5 November 2008. VCs were saying things like “nuclear winter” and “survival is the new growth”. It sounded like they were concentrating on keeping their existing portfolio companies alive, rather than investing in new ventures. The two exit routes they rely on — acquisitions and IPOs— are largely blocked right now, so they’re marking time.

One thing they did say they’d look at: a new start up with a name-brand team, one that has delivered home runs for VCs in the past. New as in today new, not last week new. They said that talent can be had cheap in this market, and they’re keeping their eyes out for bottom feeding opportunities. Although they didn’t exactly put it that way — VCs have good table manners. Usually.

But even they saw some bright spots out there. Well, maybe dark grey spots amid the generally black outlook. Taken together with the rest of the day’s discussion, there are some trends that will lead to new market opportunities, sooner rather than later:

  • Laptops are a mature product that will peak in not too many years and then start to decline. The buzz these days is around small form factor, low power, thin client, specialized devices that do the things people want to do in the specific way they want to do it. My predication: laptop penetration will flatline in three years in the U.S. and five years worldwide. Within ten years, laptop market penetration will begin to drop, and will be a quaint niche within twenty years.
  • Oh, you say, laptops are simply a computer form factor determined by the acuteness of the human eye and the dexterity of human say. True. But already in the pipeline: voice input input, gesture based input via mobile phone-sized cameras and inertial sensors, micro projectors that display phone and other mobile device output on walls or whatever, video eye glasses, video-enabled contact lenses and other heads up display technologies. And then there’s the stuff we haven’t even heard of yet. Laptop keyboards and screens will go the way of the rotary phone dial and mechanical signs.
  • Netbooks are booming right now — Intel’s Atom processor is a runaway hit. We might even see the return of the mobile phone — i.e., something you just use to talk to other people, maybe via VoIP as well as cellular systems, with text messaging hanging on as a legacy app. Watch for personal networked cameras, too, that double as scanners and other input devices.
  • How about health monitors? Think of the rig doctors give to heart patients to record vital signs for a day or two. Replace it with a cigarette lighter sized, wireless enabled device you just put in your pocket or clip on your belt, forever more. It sends out vital sign info in real time, all the time, to a computer that analyses it and alerts you and your doctor whenever something changes for the worse. Your body heat recharges it, so you don’t even have to plug it in at night.
  • The list goes on, but small, networked, mobile devices are going to be a booming market. The new ClearWire is betting its business model on it. So are a lot of other wireless players.
  • Another buzzword getting huge play right now is “cloud computing”. The heavy processing in this networked, device-rich world will be done by remote servers somewhere on the Internet. That will be particularly true for the types of applications that people use laptops for today. Computing services — storage, processing, applications, you name it — are just another utility. In the dawn of the manufacturing era, companies generated their power (electrical, steam, whatever) onsite. Not any more. The same will be true of computing.
  • If you think security is a big issue for laptops and desktops, you ain’t seen nothing yet. With all your data flying around, inside and out of the cloud, people and companies who know how to secure it will be hot beyond belief.
  • Another comment from a VC yesterday: the OS kills apps. In other words, the hotter a standalone application, the likelier that functionality will be integrated into the OS and eliminate the market for the app. Security is at or near the top of the list. The Mac OS already has disk encryption features, and their services-based business model is probably only a year or two away from jumping head first into that space. Microsoft is making big noises about the cloud — they even released a version of Windows optimized for it. Laptops are yesterday’s news for their developers, but I don’t think they have much of a clue about mobility and the cloud.

If you can make an elevator pitch like “we secure mobile devices, in and out of the cloud”, you might be able to score some capital, even during this nuclear winter. The VCs yesterday identified security and enterprise focused mobility services as a sector they might still consider. Companies like Intel are looking to boost demand and corner it while they can.

Times are tough now. No question. But there’s a huge difference between impossible and merely difficult. Doing mobile devices, services, and connecting technology and systems are very difficult right now. Which is very good news.