Telecom giants spreading venture seeds

AT&T, MCI WorldCom and Lucent backing scores of networking start-ups.

By Carolyn Duffy Marsan
Network World, 08/30/99

With venture capital investments in network start-ups at record levels, the nation's largest telecommunications companies are looking for a piece of the action.

The venture arms of AT&T, MCI WorldCom and Lucent have all ramped up their investment activities this year, and much of the money is going to commercialize products and services for enterprise customers.

"Every major technology company now has some sort of venture capital operation," explains Kirk Walden, national director of venture capital research at PricewaterhouseCoopers. "They're all looking to make direct equity investments in emerging companies. Some cynics call that outsourcing research and development, but I don't have any problem with it. It's a way of bringing innovation to the market faster."

Following in the footsteps of active investors such as Intel and Microsoft, these three telecommunications companies together have invested $740 million in more than 100 network companies.

Among the enterprise-oriented technologies being targeted with investment dollars are digital subscriber line (DSL) services, Web-based customer support, virtual private network (VPN) equipment and telecommuting applications.

DSL, in particular, appears to be benefiting from investments by these three sources. Recipients include: Covad Communications, a Santa Clara, Calif., provider of DSL services; Rhythms, an Englewood, Colo., provider of DSL-based telecommuting services; and Jetstream Communications, a Los Gatos, Calif., manufacturer of voice gateways for DSL. Both Covad and Rhythms went public this year.

"Part of the reason DSL technology has grown so rapidly is because of its access to the capital markets," says Susan Mayer, president of the MCI fund. Mayer says broadband access technologies such as DSL are one of three target areas for the MCI WorldCom Fund. The other two are next-generation Internet technologies and enhanced communications services.

By investing in emerging companies, the telecommunications giants are looking to get an edge with technologies that will enable future products for enterprise customers as well as new applications that will drive traffic to their networks. Often the financial investments are accompanied by strategic partnerships.

"We're not just looking for financial returns. We're also looking for good strategic fits or companies that fill gaps in our product line," says John Hanley, managing general partner of Lucent Venture Partners.

Hanley says Lucent's venture activity is part of a larger effort to cut the time it takes for a product to move from the drawing board to the manufacturing line. "We've cut our cycle time by about 50% in the last three years," he says. The venture activity is "one way to find technologies that will be important in three or four years."

Like Lucent, the MCI WorldCom Fund is looking for strategic relationships as well as strong financial returns from its investments. That's why the fund was attractive to WebLine Communications, a Burlington, Mass., provider of Internet customer service software that had its choice of investors when it raised $10 million in early August. WebLine officials say they selected the MCI WorldCom Venture Fund because they viewed MCI as a strategic partner.

"MCI was already a WebLine customer before they came to us about a corporate investment," says Bob Weinberger, vice president of marketing at WebLine. "Money is really a secondary benefit in a situation like this."

AT&T Ventures, on the other hand, is more interested in pure financial returns than in complementing AT&T's product lines.

"We view ourselves not as a business development function but as a group trying to affiliate with the best companies in emerging technologies," says Neal Douglas, general partner with AT&T Ventures. "We're invested very broadly in IT from semiconductors to cable content, from terabit routers to city guides, from Internet security to Internet payment systems."

Both AT&T and Lucent are investing in start-ups that don't have products yet. MCI WorldCom, on the other hand, is targeting existing companies but giving them more money.

Regardless of the approach, all three funds have a major focus on enterprise customers.

"Typically, the best application of technology where there's a viable payback model is addressing the business customer," Douglas says. "For example, we're investing in equipment that helps carriers provide better managed services to their enterprise customers."

Other areas that AT&T Ventures is focused on include technologies that bring high-speed, cost-effective bandwidth to enterprise customers as well as technologies that drive electronic commerce, such as payment systems.