Telecom still tempts investors.

LIKE hopeless romantics in search of true love, a few daring venture capitalists are still going after telecoms -- even after being so badly burned over the last three years.

The lure involves mostly wireless plays, along with a view among some -- but hardly all -- VCs that the market has hit bottom or is about to.

And venture capitalists can take heart in the fact that computers with wireless capabilities are being delivered every day to homes and offices.

"It's the one area where product is actually shipping," said Greg Martin, an associate at Redpoint Ventures. Redpoint was among a group of investors that recently arranged $22.5 million in financing for Telasic Communications of El Segundo, a spin-off of defense giant Raytheon Co. that manufactures components for wireless applications.

Jeff Anderson, managing director of Mellon Ventures Inc. in Los Angeles, said there is plenty of funding I activity in the "Wi-Fi" space, which provides a wireless link in selected areas -- for now mostly airports and coffeehouses. Mellon is a backer of Nomadix, of Westlake Village, which develops software and security that allows mobile users Internet access from anywhere. It calls this "nomadic" computing.

"The question is, what business model is going to make sense?" said Anderson. "This is really a low-cost solution that consumers like."

Some perspective, of course, is helpful when examining how far down venture capital has gotten.

Nationwide, initial venture capital rounds under the heading "connectivity/communications tools" -- networking, semiconductors, telecommunications services and wireless solutions -- stood at 38 in 1996, jumped to 230 by 2000 and then plunged to 54 by 2002, according to a survey by VentureOne and Ernst & Young.

"After all is said and done, we're seeing a 75 percent decline in venture capital spending on telecom over the past few years," said Corey Lavinsky, president of Growthink Research, which also analyzes venture activity.

Overall venture funding in Southern California plunged 38 percent in the fourth quarter of 2002 from a year earlier, to $418 million, according to L.A.-based Growthink. The number of companies receiving investment dollars has literally been sliced in half in the same period.

The case for wireless

Nevertheless, there are some tentative signs of life.

The area Growthink defines as connectivity drew 32.8 percent of Southern California's shrinking venture capital outlay in the fourth quarter of 2002, up from 14.7 percent in the like year-earlier period. Along with health care, it is one of the few sectors that continue to attract venture dollars.

The question is why?

"There's so much bad news out there with the WorldCom restructuring and everything else, that we're still running the other way," said Jonathan Funk, managing director of Allegis Capital in Santa Monica. Though Funk sees companies "dropping right and left," he thinks wireless firms in certain sub-sectors will continue to draw dollars.

To be sure, venture capitalists have plenty of reserves on hand. Investing activity has slowed to a crawl from the hectic pace of 2000 and that excess capital is searching for a home.

"There's a big overhang -- estimated at $50 billion or more -- that has to be worked off and that's what causes the rampant popularity of good deals," Funk said.

Plus, deal prices have collapsed up to 80 percent below where they were three years ago, making investments in new technology seem like a relative bargain.

Harry Lambert, managing director of InnoCal Venture Partners in Costa Mesa, had opted out of most venture funding in 2000 and 2001 after seeing so many funds commit heavily during the downside of the bubble. Recently, though, Lambert has invested in Radia Communications, of Sunnyvale, which makes chips for wireless uses.

"I think what we're seeing now is a lot of funds inwardly focused and trying to optimize their portfolio, which is to say, they're not doing much at all (with new investments)," he said.

Even now, Lambert doesn't see recovery in telecom for another year and half, "maybe longer."

And unlike the late 1990s, when venture firms feverishly cut deals (often with limited reflection on what they were getting themselves into), today's investing tends to be quite selective.

Venture firms have soured on DSL, cable and infrastructure investments that require huge investments. By contrast, wireless firms that don't require as large of an investment have attracted continuing interest from large players like Intel Corp. and Qualcomm Inc., as well as companies like Eastman Kodak Co. and the entertainment industry.

Marketing push

Much of this activity is being seen in the slew of new products and services for cell phones and laptop computers. A handful of new technologies from "Wi-Fi," or wireless fidelity, to ultra wide band, known as UWB, have marketers promising the moon. This includes everything from cell phone games branded with 20th Century Fox's "The Simpsons" to text messaging that allows mobile users to vote for whoever should be kicked off Fox's television show "American Idol."

Doug Dyer, general manager of THQ Wireless, a division of video game publisher THQ Inc. of Calabasas Hills, anticipates a huge market for mobile phone handsets with cameras built in selling for below $100 by this Christmas.

Currently, these phones sell for $200 and up.

Kodak and cell phone maker Nokia Oy already have unveiled plans to promote a new range of camera-enabled handsets, which are already popular in China and Japan.

Intel, the world's largest chip maker, has launched a family of chips under the name "Centrino," and launched a joint venture, Cometa, with IBM Corp. and AT&T Co., to build hotspots, or public connection points, where users can take their laptops and surf the Internet unplugged.

"Cell phones will no longer be considered person to person voice only," said Shawn Conahan, president of Moviso LLC in Los Angeles, a unit of Vivendi Universal Net USA.

Keep in mind, though, that past efforts to market wireless products in this country generally have fallen flat -- unlike Japan or Europe, where such applications have become second nature for years. Is this time any different?

Michael King, principal analyst at Gartner Dataquest, sees some incremental movement, but like the venture capitalists he's sounding cautious.

"I don't think we are looking at a revolutionary shift," he said. "In time this will be a compelling story, but the bottom line is that this is about fundamentally changing the way people use the telephone. The content coming on is a step in the right direction."

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RELATED ARTICLE: The '3G' Effect

To get a sense of the lure, and the peril, of emerging telecommunications markets, consider semiconductor start-up Innovics Wireless Inc.

Formed two years ago by Babak Daneshrad, a UCLA electrical engineering professor, Innovics makes chips that Improve cellular voice and data quality.

The potential market is huge. Worldwide, there are 1.2 billion cellular phone users, according to Probe Group, a telecom research firm.

Like any start-up, L.A.-based Innovics has a better chance of gearing its efforts toward developing technologies and markets, rather than muscling in on existing services. The trick is to stay solvent long enough to offer a chance of success.

Early on, Innovics placed its bets on a wireless standard called wideband COMA, which is being used in Europe and Japan as part of the so-called 36, or third generation, of wireless communications. This standard increases data transfer speeds 10-fold from existing wireless networks.

About 700 million cell phone users worldwide are on networks that are likely to upgrade to wideband COMA over the next six to seven years, according to Probe Group. The first users will likely be businesses, although the market has taken longer than expected to develop.

Wideband COMA has been having some teething problems," said David Chamberlain, Probe Group's wireless research director.

Innovics originally received $7 million in financing in 2000 from Broadcom Corn., Santa Monica-based Palomar Venturesand InterWest Partners of Menlo Park. Broadcom did not participate in a $7 million follow-on round last September. The company is seeking another $15 million.

One challenge for Innovics is convincing European cellular handset manufacturers that make most of their own chips to buy theirs instead. Innovics' chip, called Condor, lets phones receive signals from two network transmitters rather than. the usual one. The result is a substantially stronger and clearer signal for phone users and cheaper infrastructure costs for carriers.

"You can get more users in a given area because the transmitter can operate at lesser power with less interference," said Tom Willey, chief executive at Innovics.

Last month, Innovics started shipping its laptop cards to Hutchison 36 Australia, Hutchison 36 UK and Orange, a UK-based unit of France Telecom. All three launched 36 cellular networks last year. Innovics is betting carriers will adopt the laptop cards and then be willing to promote products to handset manufacturers.

There is competition in that market from public wireless networks, or Wi-Fi. Intel has started building Wi-Fi chips into laptops, a development that could eliminate the need for Innovics' card.

Michael Thuresson