Will wireless venture fund ignite?

Six months ago, this looked like the surest bet going in the technology world, even as mutterings about the inflated value of ordinary Internet stocks already were beginning to surface. Wireless technology was in the early stages of what appeared to be a classic hockey-stick growth curve, with an explosion in use still ahead.

All that still may be true. But former Microsoft luminary Brad Silverberg and his compatriots at his new wireless-focused Ignition venture capital fund have been given the financial world's equivalent of a cold shower since their bubbly March launch.

The Internet market shakeout has caught the younger wireless world in its wake. A group of high-profile wireless data stocks tracked by investment firm WR Hambrecht was down an average of 67 percent from its 52-week high by the end of last week. The publicly traded service providers, ranging from AT&T Wireless to Nextel Communications, were down 26 percent.

Ignition is still bullish on wireless, however, and the fund's executives say the market downturn might even have been a blessing in disguise for them.

"I don't think the importance of the wireless market has changed," said Steven Hooper, the former Nextlink Communications CEO who serves as Ignition's most experienced wireless partner. "What we have seen is a more reasonable, rational valuation across all start-ups."

Ignition is just one of several firms contributing to a mountain of venture capital funding and attention that has been lavished on the young wireless sector over the last year. Driven by predictions that more than a billion people would be using cell phones worldwide in just a few years, investors have been keen to get in on the ground floor of the Next Big Thing.

That juggernaut is still very much in the birthing stages, of course. While consumers in Europe and Japan are eagerly sending each other text messages, and browsing rudimentary versions of the Web on their phones, the U.S market is considerably behind. Most providers are offering some access to the "wireless Web," but interfaces are still clunky, and the service has yet to make a significant dent in the mainstream consciousness.

"Even the top players are having some credibility problems. They're all having some difficulties," said Philip Wohl, a wireless analyst with the S&P Equity Group. "A lot of the companies in our country are really years away from doing it right."

Patience is good
The market shocks do appear to do one thing, at least: hold Silverberg and his partners in Ignition to their word. On launching the venture fund with $140 million, including $100 million from Qualcomm, Softbank and Seattle's Madrona Venture Fund and $40 million from their own accounts, the partners vowed that they were in this game for the long term. Not for them is the VC's path of investing in and then pushing companies to go public for an early return, they said.

"Remember, Microsoft took 20 years to build. (Silverberg) has a very long-term focus," said Mike McCue, CEO of Silicon Valley start-up Tellme Networks and one of Ignition's initial advisers.

Most of the fund's partners do have backgrounds that lend themselves to building a long-term business. Silverberg was at Microsoft for close to a decade, overseeing the Windows 95 project and helping to push Bill Gates toward the Web browser market. Hooper was chief executive of Craig McCaw's Nextlink. Partner Richard Tong was marketing director of Microsoft's BackOffice suite, and Chris Peters helped create the company's hugely popular Office software.

Hooper said the fund's focus has changed slightly since the bottom fell out from the Nasdaq, however.

When the group started looking at the market, they saw a plethora of companies creating wireless portal-like services, aiming to provide content to the wireless Web in the same way that Yahoo or scores of smaller players do on the regular Internet.

That's changed somewhat as a result of market realities in the wireless industry and the lack of capital, Hooper said. The watch-word now is "infrastructure"--companies that can improve capacity on wireless networks, boost speeds for wireless data downloads, or tackle other slices of the still-young equipment market.

Ignition also has gained time. The pressure to invest quickly, before start-ups' valuations balloon on rumor alone, has dissipated. If the downturn has made the risk behind investments more palpable, it's also given Ignition the ability to demand more from its protégés.

"It's given us some time to continue to refine our investment model," Hooper said. "This will require businesses to have a really solid business plan, with a good way to monetize applications and services. I think that's healthy."

Ignition plans to have a portfolio of investments that cuts across all the sectors of the wireless market, from applications to infrastructure and mobile phone-focused to fixed wireless, Hooper said. But the fund may scale back its initial plans, investing in fewer companies but with larger stakes, he said.

The fund has only invested in a single company so far, participating in a second round of funding for wireless email company Etrieve.

Despite the bumps in the road for today's start-ups, analysts say that the market will recover, and the wireless growth curve will continue heading for the sky.

"We're in a period of transition," said S&P Equity's Wohl. "It's still an attractive market, and a lot of the hype is probably justified. There's a lot of money to be made out there."