Communications Infrastructure Blog Blog • Published 2016/08/08

Near instantaneous, long and short distance communications are the backbone of the global economy and are enabled by the wires, waves, hardware and software that make up the communications infrastructure.

Communications infrastructure doesn’t sound like a natural space for disruption and VC investment. Despite being an undeniably big and growing market, the ‘infrastructure’ bit sounds slow and expensive with low reliable returns, which pretty much embodies the anti-Venture Capital investment thesis. But does that mean there’s nothing there for entrepreneurs or VCs?

There are definitely things to like about the space. It is technology that encompasses numerous, multi-billion dollar markets; it has large, cash rich businesses who could be acquirers of start-ups and it has a problem; and as every entrepreneur knows problems = opportunities.

The problem is passing more data around the world than the infrastructure can handle, and the source of the problem is an increasing number of connections and an increasing intensity of data.

The global connected population is growing and the number of ‘things’ we’re bringing online is increasing even more quickly. Problem number one is that there are a lot more people and things wanting to communicate. BI Intelligence predicts 18 billion connected devices by 2018 including 4 billion Smartphones and 2 billion PCs.

BI Intelligence Estimates – The Internet of Everything: 2014
Problem number two is that each of these end points wants to communicate more stuff with the others.  In people-to-people communications we’re seeing this with a huge increase in the use of video and this is compounded because we’re also moving to higher and higher quality video, which means even more data. Cisco predicts that three quarters of the world’s data traffic to mobile devices will be video by 2020.

Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2015-2020
And the combination of these things means that we now talk about annual global IP traffic in numbers so big no one has ever heard of them – in 2016 for the first time, annual global IP traffic is expected to surpass the zettabyte (1021 bytes); that is about 250 billion DVDs worth of information. This is 25 times more information than was transferred 10 years ago and the number is expected to double again in the next four years. Dealing with all this traffic is an increasingly expensive underlying infrastructure that struggles to cope with the base data load, let alone spikes of usage at busy times.

So what opportunities does this open up?

Well, there are some areas which are not so VC back-able, like:

  • Communications hardware (the return profile doesn’t normally work for VCs)
  • Most things that rely on setting or using emerging standards (you don’t want to get caught on the wrong side of a Betamax vs. VHS fight)
  • New telecoms businesses (too much competition and too much regulation)
  • Most things that involve having telecoms companies as acquirers or your only customers (these businesses, including the mobile operators, have become utilities and VCs and entrepreneurs are normally wary of interacting with utilities because they’re risk averse very slow moving)
What is interesting to VCs are the capital light, software layers of infrastructure that address specific challenges created by increasing numbers of connections and increasing amounts of data. These challenges include security, latency, prioritising information flows and data management among others. At Octopus Ventures we’ve already made investments in companies tackling these issues – companies like Miracl in secure authentication and Zynstra in hybrid cloud computing as well as businesses we have exited like Magic Pony in clever video delivery and CSL DualCom in secure connectivity.

Latency in particular is a really interesting problem. In an age with lots of choice and limited differentiation, when you open a website or mobile app, the speed at which a page loads makes a big difference to whether you keep using it. And when you’re streaming lots of data like HD pictures and video over communication channels that aren’t getting bigger quickly enough, this causes problems. Over a decade ago, Akamai started building Content Distribution Networks (CDNs) to make sure that websites with data rich content load quickly for users across the world. According to MarketsandMarkets, today the CDN market is worth upwards of $5bn and Cisco estimates that in 2016 almost half of all global internet traffic will go over CDNs. We believe that companies running smarter, faster, capital efficient peer-to-peer CDNs, or networks and protocols that can handle video (and in particular video on mobile) will be valuable and we’re on the look-out for unusually talented entrepreneurs building, or aspiring to build, big businesses in the space; so if you are one or you know of one, drop us a line…

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