Money, it seems, is no longer too tight to mention - at least not in the venture-capital (VC) industry, where there's growing evidence of a definitive shift in mood when it comes to new deals. To be sure, the latest headline figures from the sector will help to galvanize the ranks of would-be fibre-optic and photonics entrepreneurs passionate about turning their innovative ideas into successful companies. According to a report published in The Economist (9 April), Silicon Valley start-ups received $1.6 bn (€1.3 bn) of VC money in the fourth quarter of last year – that's $300 m more than in the previous quarter. Here in Europe, the outlook is brighter, too, with VC firms reporting that write-offs of troubled technology investments fell by half in 2003 compared with the year before.
The big picture also looks promising: the Nasdaq index of technology stocks is up 70% since its low point in October 2002; there have been more than $6 bn-worth of initial public offerings in the US alone this year (compared with just $300 m over the same timeframe in 2003); and the corporate sector's appetite for mergers and acquisitions appears to be returning. So far, so encouraging. Yet the fundamental issue for the VCs remains how to sort the winning start-ups from the also-rans - especially difficult in an already crowded sector like optical comms and photonics. Make the right bets and a diversified VC portfolio will yield handsome long-term returns. Get it wrong, though, and things can turn ugly; just look at the decimation among small tech companies over the past three years.
Our report on the OFC conference is instructive in this respect (page 19). The hot topics - fibre-to-the-premises; delivery of broadband services; CWDM; and optical integration - indicate that the industry's brightest and best have readjusted their development roadmaps to fit with the post-slump priorities of the telecoms operators. What's even more encouraging, however, is the fact that plenty of VCs are supporting these shifts in emphasis with targeted investment. For example, some of the most notable deals in recent months include an $8.5 m round for Net Insight, a Swedish provider of video, voice and data networking gear for broadband and broadcast applications; a $10 m second round for Fiberxon, a US-Chinese supplier of optical modules for access network applications; a $23.5 m third round for ASIP, a US-Dutch developer of photonic integrated circuits; a $24.5 m third round for World Wide Packets, a US vendor of Ethernet access gear; and a whopping $40 m second round for NeoPhotonics, another specialist in photonic integration.
All of this adds up to more than anecdotal evidence of renewal. After three years in the wilderness, it seems the optical networking sector is once again attracting investors. Yet the VCs, after being burnt badly by their over-exuberance last time around, will be looking long and hard at any start-up business plan before signing the cheques. How credible is the market opportunity? What's the track-record of the management team? What is the sustainable advantage of a small company's intellectual property? Don't bother applying unless the answers are compelling.
• This article originally appeared in FibreSystems Europe in association with LIGHTWAVE Europe April 2004 p5.