The number of deals and dollar amounts going into wireless is second only to the number and size of deals in the white-hot optical networking business, say veteran VCs in the communications space. Competition for good deals is high, pushing up valuations and putting entrepreneurs securely in the driver's seat.

"There has been a dollar shift out of a lot of Internet investments into optics and wireless," says Roland Van der Meer, a general partner at Comventures, a Palo Alto, California-based VC firm.

More than $620 million's worth of venture capital went to wireless equipment and service providers in the first quarter alone, almost half of the total invested in all of 1999, according to venture market researcher VentureOne.

That's understandable given that the wireless market is bursting at the seams. U.S. wireless subscribers will grow from 68 million this year to 143 million by the end of 2005, and spending for wireless data services will soar from a marginal amount to $8.4 billion in the same time frame, according to research consultancy The Yankee Group.

New funds and other investment vehicles are springing up alongside huge established venture funds such as Comventures, Spectrum Equity Investors, and Accel Partners.

WIRELESS INCUBATORS APLENTY

Besides the new Ericsson Venture Partners (EVP), a rash of incubators have sprung up for wireless startups, including eCompanies Wireless, a joint effort announced last week by eCompanies and Sprint PCS. It joins a wireless incubator formed by IdeaEdge Ventures and Qualcomm in April -- which has more than $1 billion at its disposal from Qualcomm, Enterprise Partners, Investor AB, and Sienna Holdings -- and Ignition, a wireless incubator spearheaded by former Microsoft senior vice president Brad Silverberg with $140 million from Softbank Venture Capital, Madrona Venture Group, and Qualcomm.

In the midst of all the stand-alone wireless venture funds and incubators, large corporations are getting into the game. Ericsson's new fund will compete with established funds created by Motorola, Nokia, and others.

"Since the industry is so nascent, there is a tendency to throw money at everything from Bluetooth [a communications standard] to WAP [wireless application protocol]," says David Wright, a vice president at the research firm Aberdeen Group. "There's a lack of later-stage investing discrimination and old-economy acumen, so the wireless sector has amazing valuations."

Comventures, which has been around for about 16 years, has seen pre-money valuations go from about $7 million per deal four years ago to about $25 million today. Also, the size of the deals has shot up from several million dollars to an average of $15 million, Mr. Van der Meer says. "We're now putting in $15 million at a $20 million valuation and getting 40 percent of the company," he says.

At the same time, there has been an explosion of wireless startups seeking venture capital. "There's been a tsunami in VC funds focused on wireless and wireless business plans," says Mark Lowenstein, executive vice president of the wireless research group at The Yankee Group.

FIELDING OFFERS

It is against this backdrop that wireless startups are popping up. The best of them are getting hit with offers from all sides. They must figure out what they can get from, say, Ericsson, as opposed to a traditional VC, or whether they should go after both.

Newly formed Ericsson Venture Partners is funded with $75 million from four general partners -- Ericsson, Merrill Lynch, Investor AB, and Industrivдrden. Ericsson could have raised a larger fund with many more partners, but it turned away about 25 requests from individuals, VCs, and companies to participate, says Rolf Eriksson, an Ericsson VP who has been involved in the creation of the fund.

Mr. Eriksson says that money is not the issue. "The amount really doesn't matter," he says. "We can increase it as we see fit, and maybe we [Ericsson] will end up spending $1 billion."

Ericsson has close ties with Investor AB and Industrivдrden, both Swedish enterprises. "We've been working with Ericsson for 15 years as their primary banker out of our London office," says Joe Shell, Merrill Lynch's chairman of global technology banking. "In discussions last spring, we were talking about various forms of investing Ericsson could do in the mobile tech space."

The venture fund will have four senior partners and a support staff. None of the partners has been named, and EVP is searching for a veteran venture capitalist to run the business. The firm is expected to be operational by the first of the year.

Mr. Eriksson says EVP will primarily focus on "early- to mid-stage" companies, and its deals will range from $2 million to $20 million.

NOT THE FIRST TIME

This is not Ericsson's first foray into venture investing. It already has a $300 million Hong Kong-based Asian fund, and a $50 million fund in Australia that it runs with Deutsche Bank. For years it has made direct investments through a business unit called Ericsson Business Innovations, which has made about $100 million in investments to date, some of them in companies spun out of Ericsson. The company says its minority investments in other companies are worth $1.2 billion.

As for EVP, it will focus on Northern Europe and North America and will consider all aspects of wireless technology, from infrastructure to services to next-generation applications. No product is too cutting-edge or obscure, but EVP will scrutinize them first. "We're betting on promising communications, but we'll invest in them when the economics are warranted," says Merrill Lynch's Mr. Shell.

Examples of some of the kinds of companies EVP plans to bet on include startups that create devices or software that enable the transfer of images (both still and streaming) between cell phones and other mobile devices.

It will also target apps that drive the proliferation of wireless devices in cars.

Ericsson has already had some success with venture investing. It put $40 million into Juniper Networks that's now worth $3.5 billion, according to a company spokeswoman.

Even with that success, Ericsson doesn't have the track record of venture capitalists that have been investing in wireless for years. Why would an entrepreneur go with Ericsson over an established VC?

"Because we have a vested interest in seeing that the mobile Internet industry is successful," Mr. Eriksson says. "This is the reason why." He notes that Ericsson spent $4 billion -- 16 percent of revenue -- on R&D; this year.

Torbjor Nilsson, Ericsson's marketing chief, downplays the fact that some of the company's competitors made inroads into the U.S. venture market well before it did.

"Both Motorola and Nokia are struggling at their own games," he claims. "Motorola, for example, is going through turbulence with many of their investments in satellites like Iridium."

Spokespeople for Motorola and Nokia did not return calls for comment.

WORDS OF WARNING

Silicon Valley VCs warn that wireless entrepreneurs should be careful about taking money directly from the venture arms of large corporations.

"Venture capitalists remain the best support mechanism for developing companies," says Kevin Maroni, a managing general partner and wireless specialist at Spectrum Equity.

Startups can back themselves into a corner by aligning themselves with a single vendor, Mr. Maroni warns. "At the end of the day any company needs to have vendor diversity. If you're relying on one vendor and that vendor catches a cold, you get pneumonia."

He adds that startups need to understand that corporations are more interested in what's good for them, not necessarily the startup. For example, the new incubators that have been launched by corporations are more interested in developing products that complement their own, not in growing startups.

Mr. Van der Meer agrees. "There are a lot of benefits [to hooking up with corporate venture partners] in the later rounds, but in the early stage there is a lot of risk because that's not what they do for a living," he says. "Plus, you don't want to be too linked into one corporation early on. You may lose options for later rounds."

He notes, like many other venture capitalists, that corporate VCs have a history of getting into markets when they're hot and pulling out when they're not. "Having been in the business for about 16 years, I've seen corporations come and go," Mr. Van der Meer says. "We'll be in the market when they're out of it."

Lawrence Aragon contributed to this story.

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