Friday, June 4, 2010

Time for customers to pony up

There was news this week that Morgenthaler Ventures is ending its track for funding opto hardware start-up companies, mostly in silicon, but including optical components. This is not good news, to be sure, but maybe it's time again for the systems integrators to finally pony up for components research.

The conventional wisdom here in Silicon Valley is that venture-backed start-up companies form the engine of innovation for industries. The venture capitalists are nice enough to invest piles of money in component research, with the hope that they'll make even bigger piles for their investors, when they sell the start-up to a Cisco or an IBM, or they take it public.

Trouble is, I don't know how many times I've heard the systems integrators complain that they need new opto technology now. Not next year, not next month. Now! And these are the companies that are getting decent profit margins, unlike the components suppliers (don't make me name names, please). Well, if this stuff is so darned vital, the systems vendors should be willing to pay big bucks for it, right?

The VCs aren't investing in optical communication components because they don't see the return in it. If things get bad enough, the integrators will have to take on more risk. If that becomes too expensive, maybe they didn't really need it today, or even tomorrow. My bet is that they do need it, but were happy to let someone else pay for the development.

The wild card is whether some Asian government, such as Korea or China, will fill the gap in funding and gain a permanent advantage in the components market. If you think that the venture financing model is driven by a herd mentality or is too narrowly focused to be effective, then that may well happen. But if you think that, for all of its faults, the VC model is mostly rational and market driven, then it's just China's money getting wasted, to the benefit of the systems vendors.

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