Ask HN: Would any VC fund a new telco/cell provider?
Virtually nobody has good things to say about Verizon, Sprint, or AT&T. Competing with them requires significant capital, but there is considerably money in the market. What's missing? Why isn't a new VC backed company coming in to 'do it right'?
9 comments
It can't work without an investment of $10B or larger if you want to make even a small dent in the wireless industry, due to spectrum rights (in the USA). This type of money is not VC money but more private equity firms.
MVNOs don't work because the wireless carriers hold all the cards and they don't let you in on any profits. Most successful MVNOs are owned by the major carriers for a reason. If you think retail wireless data prices are high try looking at what wholesale wireless data costs are, you can't operate a successful business with those prices. AT&T won't even sell MVNOs data, it's voice&text only. Even if you become successful carriers can shut you down whenever they want. Having been down the startup MVNO road I have learned my lessons, unless the government forces competitive wholesale pricing the best you can do is build a customer base and than sell it all back to your carrier like what Boost & Virgin did. MVNO is possible with VC funding but the success rate will be even worse than the current social apps, and there is no big payday.
WiFi networks sound great but can't work because the range isn't there, even in highly populated areas you will run into interference which will bring data speeds due to every slow speeds. There is a reason Google WiFi didn't work even in Mountain View.
The cheapest method is probably "buying" exclusive rights (franchise rights) to be the local phone or cable company, like the large telcos do one at time and building a fiber network. In most cities ATT/Verizon/Comcast/etc... will just outbid you. Than you have to convince (buy/lobby) city council members and/or mayor. To do a decent sized city you are looking at tens of millions in bootstrap mode.
If anyone out there thinks they can get VC invest in the 7 figures or higher for a MVNO or local landline/cable company project. Feel free to get in touch with me I am always interested in an adventure.
MVNOs don't work because the wireless carriers hold all the cards and they don't let you in on any profits. Most successful MVNOs are owned by the major carriers for a reason. If you think retail wireless data prices are high try looking at what wholesale wireless data costs are, you can't operate a successful business with those prices. AT&T won't even sell MVNOs data, it's voice&text only. Even if you become successful carriers can shut you down whenever they want. Having been down the startup MVNO road I have learned my lessons, unless the government forces competitive wholesale pricing the best you can do is build a customer base and than sell it all back to your carrier like what Boost & Virgin did. MVNO is possible with VC funding but the success rate will be even worse than the current social apps, and there is no big payday.
WiFi networks sound great but can't work because the range isn't there, even in highly populated areas you will run into interference which will bring data speeds due to every slow speeds. There is a reason Google WiFi didn't work even in Mountain View.
The cheapest method is probably "buying" exclusive rights (franchise rights) to be the local phone or cable company, like the large telcos do one at time and building a fiber network. In most cities ATT/Verizon/Comcast/etc... will just outbid you. Than you have to convince (buy/lobby) city council members and/or mayor. To do a decent sized city you are looking at tens of millions in bootstrap mode.
If anyone out there thinks they can get VC invest in the 7 figures or higher for a MVNO or local landline/cable company project. Feel free to get in touch with me I am always interested in an adventure.
I feel like the future competitor of telcos won't be a telco. It will be something like an interconnected wifi network spread across a vast area. Imagine a city like New York or SF, with wifi access points everywhere. You use a "phone" to access this network. In other words, an iPod touch that's designed specifically for communication over wifi networks.
Obviously that's a wild prediction, and I really don't know much about cellular network, but hey, it seems possible.
Obviously that's a wild prediction, and I really don't know much about cellular network, but hey, it seems possible.
Because there's not enough reward for high risk.
VC (and PE & Sovereign Wealth funds) do make multi-billion dollar investments, but mainly in areas like energy where they can get a huge pay-off.
Say you wanted a fund to invest $20bn for 100% equity, generally early stage investment funds look for at least a 10x return, so they'd be looking for a company that can be worth $200bn.
The biggest cell provider in the US in Verizon, and their market cap is around $100bn. To justify the investment you'd need to build a company that pretty much controls 100% of the US cell phone market. And even then there's no upside for the investor, they might get 10x if they're amazingly lucky, there's pretty much zero chance of 20x or 100x return.
VC (and PE & Sovereign Wealth funds) do make multi-billion dollar investments, but mainly in areas like energy where they can get a huge pay-off.
Say you wanted a fund to invest $20bn for 100% equity, generally early stage investment funds look for at least a 10x return, so they'd be looking for a company that can be worth $200bn.
The biggest cell provider in the US in Verizon, and their market cap is around $100bn. To justify the investment you'd need to build a company that pretty much controls 100% of the US cell phone market. And even then there's no upside for the investor, they might get 10x if they're amazingly lucky, there's pretty much zero chance of 20x or 100x return.
That's a very good point, thanks.
I think this is like asking why there isn't a new Gas company that is perfectly happy with smaller margins.
Significant capital doesn't begin to describe the problem. It's easier to start a car company than telco/utilities, and you don't see too many venture backed car companies.
Are you asking just because, or is this something you're going to try?
Significant capital doesn't begin to describe the problem. It's easier to start a car company than telco/utilities, and you don't see too many venture backed car companies.
Are you asking just because, or is this something you're going to try?
I think the bigger problem is because, like your aware, that you would need a lot of capital to compete with the major telco/cell companies like the ones listed, it would be more reasonable to create a company that requires less funding by starting with a smaller market to fine tune the company and then seek out larger investors. The problem with this is that even though you won't be initially concerned about the competition from Sprint, Verizon, AT&T, and Tmobile as you would be applying yourself to a less mainstream (aka: different) market, there are still many competitors that have 'fixed' the complaints about the big companies who have a head start over you (ie: Boost Movile, Cricket, even Virgin Mobile). So unless you have an idea superior to these smaller upcoming companies, it will be a very difficult industry to enter in to and raise capital for.
For what it's worth, Boost, et. al are MVNOs - they simply resell/rebrand Sprint service. They're not 'real' cell carriers.
There are certainly VCs that would take on large entrenched companies. VCs invested $33 million in Cuil, for example, even though Google had cornered the search engine market long before. And VCs fund companies that require huge capital investment, like medical devices and alternative energy. But both of these issues are big red flags that will make it a lot more difficult to get your company funded.
In a situation like this, I'd expect you'd need to convince an investor that (1) you have a sustainable competitive advantage against the big players, so they can't just take your idea and destroy your business, (2) your business model can generate enough profit to justify the outlandish capital requirement, and (3) you have the right team to make all that happen. #3 is a lot easier when you don't have such big hurdles with #1 and #2.
In a situation like this, I'd expect you'd need to convince an investor that (1) you have a sustainable competitive advantage against the big players, so they can't just take your idea and destroy your business, (2) your business model can generate enough profit to justify the outlandish capital requirement, and (3) you have the right team to make all that happen. #3 is a lot easier when you don't have such big hurdles with #1 and #2.
Because building the right executive team is hard... who do you go to for great guys?
Based on this the current generation of telco execs is a no go. So do you look outside the USA? Now we're talking hard work for a pretty risky venture.
That said, there is certainly a market for this, especially for M2M.
Based on this the current generation of telco execs is a no go. So do you look outside the USA? Now we're talking hard work for a pretty risky venture.
That said, there is certainly a market for this, especially for M2M.
Canada did this with Wind Mobile that is shaking up our industry a bit but it had to get funding from an Egyptian telecom giant.
because we're not raving lunatics?