NW wireless muscle starting to flex again

A roundtable discussing the newest trends in the wireless industry last week drew a hearty crowd to a Seattle law office on an otherwise overcast day.

But the 60 people there were hardly gloomy.

In fact, they brought an enthusiasm that spurred such responses as "of course" when attendees were asked whether they, too, were starting a wireless venture.

It turns out half of the people in the room were starting companies, allowing the event to serve as a microcosm of today's Seattle startup scene.

The wireless industry has always been strong here, something amplified by a quarterly report on venture investing issued today by VentureOne and Ernst & Young.

The Puget Sound region has been home to McCaw Cellular Communications, which later became AT&T Wireless (and today is Cingular Wireless), and Bellevue is where VoiceStream Wireless was founded and later became T-Mobile USA.

But there is a new generation of wireless companies in development. This time, upstarts are less concerned with networks and more centered on applications.

The trend is said to be a reflection of the second wave of the Internet, called Web 2.0, and it doesn't hurt that Seattle has a lot of software engineers.

"I think a Web 2.0 company that has thought about its wireless strategy is something fundamental," said Dan Rosen, a startup consultant and former venture capitalist.

"If you think about it, Web 2.0 is about the realization of using the Web in your daily life, and most of our life is spent wirelessly," he said.

A number of startups locally are building off the dual expertise of wireless and software.

The Venture One/Ernst & Young report shows Washington communications companies — many developing wireless networks and services — are on track to receive at least as much money this year as last, despite a downtick this past quarter.

National figures also show a slight increase in activity in the communications sector.

Home sweet home

Two companies participating in last week's roundtable are developing wireless applications.

Seattle's Ontela is creating a wireless service that helps camera-phone users upload pictures to the Internet, and mPoria provides a shopping service on the mobile phone.

But countless other wireless companies have started here, including M:Metrics, which researches wireless consumer habits; Melodeo, which creates mobile podcasting software, Medio Systems, which is creating a mobile search application; Bellevue's SNAPin, which is developing self-help tools for the mobile phone; and Sotto Wireless, which helps companies cut their landlines by providing cellphones that work off a Wi-Fi network when indoors.

"This is a wonderful confluence of things. There's still a lot of carrier presence in Seattle, compared to anywhere else," said Tom Huseby, a partner at Bellevue's SeaPoint Ventures.

In addition to Cingular's offices and T-Mobile's headquarters, Alltel maintains an office in Bellevue after buying Western Wireless.

Clearwire, a company started by pioneer Craig McCaw, is building a wireless data network called WiMax from its headquarters in Kirkland.

Huseby said that when that level of wireless expertise is mixed with rich software skills, innovation starts to occur.

"We basically have 1 ½ carriers, which is more than any other location; we have the McCaw mafia rattling off the walls, and then we have Microsoft, which has been a magnet for software engineering," Huseby said.

Innovation is only one side of the equation. There also must be money to fuel the startups, a resource flush here with multiple investment organizations focused almost exclusively on wireless.

For instance, former Western Wireless executives including CEO John Stanton have started Trilogy Equity Partners. Rally Capital is led by Dennis Weibling, formerly of Nextel Partners, which was a Nextel Communications affiliate before both were purchased by Sprint. And there's also Eagle River, McCaw's investment arm.

In addition, Huseby's SeaPoint scouts wireless deals for funds in California. Bellevue-based Ignition Partners, which has a number of partners from the wireless world, is fairly active.

Recent occurrence

If wireless products and services are being created and getting funding, it's only a recent occurrence.

The broader communications sector, which includes fiber-optic networks, wireless networks and services and telecom companies, was hugely affected by the technology bust in 2000, even though it received far less publicity than the downturn of the Internet business.

In 2000, almost $23 billion in venture capital was invested in communications deals, according to VentureOne. The following year, that fell to $8.6 billion.

In Washington state, that sector was hit even harder — $715 million was invested in 2000, plunging to $150 million the following year.

The downward momentum continued until bottoming out in 2004 and 2005.

VentureOne research manager Jessica Canning said investment soared during the bubble because everyone assumed the increase in Internet traffic would need a network to support it.

"It really was the telecom and Internet bubble that hit at the same time," she said.

Although things have improved, it is still early to call the increase a full recovery.

In the U.S., the communications sector received $2.4 billion during the first three quarters of this year. That will likely meet or surpass the $3.1 billion invested in 2005.

If you look at what is doing well within that sector, you will see increased investments in wireless equipment and service providers.

So far this year, $969 million has been invested nationally in wireless deals, beating the $931 million raised for all of 2005.

The equivalent figures are not yet available for Washington state, but the broader communication sector is faring well.

So far this year, three companies here raised $44.3 million. Although none received investments in the third quarter, the year is still on track to outpace 2005 when four companies received $50.5 million.

Clearwire, considered a wireless-network company, has raised more than $2 billion but was not included in the report.

Competition a challenge

Huseby said one challenge with more companies entering the space is that it increases competition.

Typically, if a company is building a mobile application, it is trying to sell it to the wireless carriers.

"It's getting harder to sell anything to the carriers," he said.

That raises the question as to whether the short-term increase in investments and interest by entrepreneurs will be sustainable.

"Just because there's a lot of startups, doesn't mean there's going to be a lot of successes," Huseby said.

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com