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Venture capitalists predict wins

Venture capitalists are placing their bets on broadband and infrastructure as among the most promising technology investments of the future.

SAN FRANCISCO--Venture capitalists at the NationsBanc Montgomery Securities 15th annual Technology Week conference here today are placing their bets on broadband and infrastructure as among the most promising technology investments of the future.

"Broadband access will be a great market," said Geoffrey Yang, a general partner with Institutional Venture Partners. Yang also pointed to cable, satellite, and digital subscriber licenses as growth markets.

Yang was joined on a panel at today's investor conference by John Doerr, partner with Kleiner Perkins Caufield and Byers, and Michael Moritz, a general partner with Sequoia Capital .

Doerr, whose firm is an investor in @Home predicted that cable would dominate in the race to bring broadband service to consumers in a big way. He cited one instance, however, in which his firmed guessed wrong in its effort to predict the next great technology victory.

"We were way early on pen computing and we were way wrong," Doerr said of his company's expectation that pen devices ultimately would replace the mouse.

Moritz, for his part, also pointed to broadband as a technology with great revenue potential, but said merchandising on the Internet is the area investors should be watching most closely.

"It's all about merchandising," Moritz said.

Venture capital hit a record $3.57 billion in the third quarter, with high-tech companies attracting $2.3 billion of the total amount, according to a Price Waterhouse survey. As usual, software and communications companies attracted the bulk of VC investments.

Internet infrastructure also will play an important role in future investing, Yang said, as more corporations come to depend on the Internet to run their operations, and to facilitate customer and vendor relations.

He noted that his firm has taken a holistic approach toward selecting infrastructure deals, meaning that it looks simultaneously at core network technologies, like routers, switches, peripherals, and network access, rather than waiting for one aspect of the equation to catch up with the others.

That approach has paid off in that it has allowed Institutional Venture Partners (IVP) to get a jump on its competition, which has tended to place bets on one segment at a time while waiting for technology in the other areas to ramp up.

VCs, which cash out of a company either when it goes public or is acquired, have found that networking companies are acquired in 75 percent of cases, whereas software companies are acquired in 50 percent of all deals made, and semiconductor companies in only 25 percent, Yang said. He added that, in most cases, buyout prices have been on par with IPO proceeds.

In order to catch the attention of venture capitalists, companies looking to fund their operations typically must possess several characteristics, Yang said. IVP, for example, breaks down its investments into two broad categories: "brave new world" companies that are establishing new paradigms, and "faster, better, cheaper" companies that aim to vastly improve existing technology.

Yang said that the faster, better, cheaper deals typically provide steady returns on VC investments, but pointed out that it is the brave new world deals that can "hit the ball out of the park."

The faster, better, cheaper business plans must offer pricing and technology improvements that are not only ten times better than those provided on the current market, he said, but they also must possess the potential to become a leader in driving the market to a new dimension. The criteria for brave new world candidates, on the other hand, include having a huge market already established and a great management team already in place.

In the Internet space, critical mass and being the first to market are key requirements.

"The critical mass issue that exists today didn't exist a year ago," Yang said. "And if you're a new entrant, where there are already four or five players and you're trying to build your brand, the cost to do this will be on the magnitude of one to two times more."