Who are the next hot mobile networking startups? Bessemer aims to find them at MWC

When you think about the term “hot startup,” you generally don’t think of wireless infrastructure. In a world of Pinterests and Instagrams, companies specializing in byzantine telecom protocols and arcane mobile standards don’t really sound that exciting. But Bessemer Venture Partners has shown there is money to be made in the mobile networking world.

Last month, Cisco Systems scooped up Israeli self-optimizing network outfit Intucell, one of Bessemer’s key portfolio companies. The networking giant paid $ 475 million for the company just two years after Intucell raised its $ 6 million Series A round. But that wasn’t a fluke investment. Bessemer has made mobile infrastructure a significant pillar in its investment strategy.

mobile phone and telecommunication towers While Bessemer is perhaps best known for its investments in LinkedIn and Skype, its most spectacular exit in the mobile networking space was Flarion Technologies, a pioneer of the orthogonal frequency division multiplexing access (OFDMA) technology that is now at the heart of all 4G networks. In 2006, Qualcomm bought Flarion for $ 600 million.

Its current portfolio includes mobile data traffic shaper Vasona Networks, 4G chipmaker Altair Semiconductor and network API developer Twilio, but after the exits of Intucell last month and Traffix Systems last year (bought by F5 Networks), Bessemer is looking to reload. One of the places Bessemer hopes to find to find its next wireless darling is at the world’s largest mobile trade show, Mobile World Congress.

Next week in Barcelona, Bessemer’s lead wireless partner Bob Goodman is wading into a miasma of LTE-Advanced, HetNet, diameter signaling, envelope tracking and self-optimized networking. Before the show, I had a chanced to talk to Goodman about what exactly he’s looking for at MWC and about Bessemer’s wireless strategy in general.

Wireless has been a tough on the investor

Investment in telecom infrastructure startups has plummeted in recent years even as investment in services and applications has recovered since the last recession, according to Ovum. In the 12 months ending in June, new money going into networking companies was just $ 270 million, compared to $ 796 million two years before.

There’s a reason VCs are reluctant to invest in telecom, Goodman said: It’s such a stratified market. While there are hundreds of carriers around the world they tend to buy their equipment from just a handful of vendors such as Ericsson, Nokia Siemens Networks, Alcatel-Lucent, Huawei and Cisco. Small players have traditionally found it extremely difficult to get on a carrier’s radar unless you had a big vendor at your side.

After Flarion’s sale in 2005, Bessemer stopped investing in wireless players for several years. Not only were the economics difficult for small companies, but the mobile industry seemed to be going nowhere. 3G networks went up, but they were primarily used for voice. The mobile data revolution we had been promised simply didn’t happen.

iphone-3g But a few years ago, Bessemer jumped back into the infrastructure space. According to Goodman, several trends converged to make the market much more attractive. First, there was the iPhone, which reinvigorated the smartphone and drove a deluge of mobile data traffic over carriers’ networks. Operators were looking not only for technologies to add capacity to those networks, but also technologies to manage and optimize that traffic flow.

While data usage was exploding, the big infrastructure incumbents were fighting a massive price war over international borders. “Huawei and ZTE drove costs down, which led the vendors to chop their investment in R&D,” Goodman explained. So just as carriers needed new innovation, their suppliers weren’t in a position to deliver it.

Finally and most recently, the old carrier-vendor ties began to break down. “The carriers have changed their tune,” Goodman said. “They used to want as few vendors as possible, but now that those vendors are all suffering, they have started looking beyond them.”

Intucell is a good example of how startups are taking advantage of that trend. Goodman and fellow Bessemer wireless specialist Adam Fisher introduced Intucell — then an eight-employee company — to AT&T in 2011. After working with the company’s technology for nine months, first in AT&T’s new Innovation Lab in Israel and then in live trials over AT&T’s 3G networks, Ma Bell committed to a system-wide deployment across its 3G and 4G footprints.

Goodman is convinced that much of the new innovation in mobile is going to be done by small startups in places like Tel Aviv and London, not in the big vendor labs in Stockholm or Helsinki. And now that carriers are willing to work directly with startups — AT&T, Verizon Wireless and Sprint have all opened innovation labs for just that purpose — there’s even more incentive for entrepreneurs to attack the mobile networking market.

What Bessemer is looking for in a startup

If anyone understands the dynamic between carriers and small infrastructure players, it’s Goodman; he’s played for both sides. Before joining Bessemer in 1998, Goodman founded Celcore, a distributed cellular networking company that was bought by Alcatel, and Boatphone, a mobile operator out of the Caribbean. That gives Goodman a perspective on what to look for among the thousands of companies and entrepreneurs converging next week in Barcelona.

I asked Goodman what criteria he was using to evaluate the companies he meets. (As you might expect, he wouldn’t reveal who he plans to talk to.) He boiled his approach down to three things:

Software: While Goodman isn’t ruling out hardware companies, he still favors companies that write code versus companies that build boxes.
No straw men: Goodman is looking for a company that has identified a very specific problem carriers face and has developed a very specific solution to address it.
Speed to market: The telecom industry has tirelessly long development cycles with some technologies taking nearly a decade to make their way through the standards process and into commercial networks. Goodman wants technology that carriers could feasibly deploy as soon as it is developed.

“We want to find a carrier problem — an immediate problem — that a really talented group of people can identify and can solve relatively quickly,” he said. “We also want to be able to go directly to the carrier. You don’t want someone else standing between you and the customer.”

There’s evidence that Goodman is willing to bend some of those rules, though. You could argue Goodman’s most successful investment venture broke all of the rules. Flarion built a base station box, which ultimately didn’t sell because it emerged at a time when mobile data use was insipid. Ultimately its OFDMA technology wound up in Qualcomm’s LTE architecture, but only after a long process of standardization.

There are always going to be exceptions if a company is building something exceptional, Goodman said: “I would never rule anything out completely.”