May 15–HIGH-SPEED INTERNET CONNECTION CARRIES A STEEP PRICE: Palo Alto’s start-up crowd is a bit perplexed about the city’s policy on fast Internet connections. The city built an undergroundhigh-speed digital fiber loop for businesses to connect to, but it’s prohibitively expensive even for some people right on top of it.
The city is charging start-up Core Mobility $10,000 to dig a three-foot trench across the sidewalk. That’s required to connect a Hamilton Street fiber to Core Mobility’s building, also on Hamilton.
Core Mobility, with 30 employees, is struggling with other bills and doesn’t have the cash. So Chief Executive Konstantin Othmer is relying on a friend, located two blocks away, to beam him 10 megabits of bandwidth from an antenna in direct line-of-sight of Core Mobility’s offices.
The fiber, which runs at 100 megabits, is what every company dreams of. Even Core Mobility’s connection, which drops to 10 megabits because of the relay, is enough for most of the company’s needs. Still, Core is still looking for a way to get access to 100, which Othmer says is required if they are to do the Web hosting they want. “The city is doing 90 percent of the work, but leaving the remaining 10 percent undone,” says Jaggie Ayyangar, Core’s engineering manager.
Palo Alto says its network is run like a business, and that costs do vary, depending on construction and engineering needs. Josh Wallace, a city account manager, is aware that some companies are unhappy: “We’re trying to get there,” he says.
At least Core Mobility has the option. Applied Materials Ventures, a venture firm funded by the public company of the same name, is based on Crane Road in downtown Menlo Park. Partners Julien Nguyen and Fahri Diner are exasperated, they say, because they can’t get access to high-speed fiber even if they pay big money.
Menlo Park just doesn’t offer it. “Our e-mail is so slow, I don’t want to admit to our (portfolio) companies how small our bandwidth is,” says Nguyen. Video conferencing is not an option. Doing some rough math, Nguyen says his DSL connection is 300 times slower than the 10 megabit connection he wants. “I prefer to check e-mails from home,” he moans.
He and Diner propose that the city, which is in charge of building permits, consider requiring real estate developers to supply fiber to new residential homes and business offices. They worry the lack of sufficient broadband connection for many of Silicon Valley’s start-ups threatens the area’s competitive edge and future economic growth. Citing the moves afoot in Taiwan, Korea and China to link up homes to fiber, Nguyen says, “We’re really in danger of falling behind.”
Granted, many of the cities in Taiwan, Korea and China are denser than the Bay Area. More residents and workers per square mile lowers the overall cost of connecting them with fiber.
Audrey Seymour, Menlo Park’s assistant city manager, said she welcomed the proposal, and wants to hear more.
Other Bay Area communities are limping along. Eric Freidenrich, a travel counselor in Woodside, worked for years to get a high-speed line, and only a year ago landed a decent connection through Pac Bell. “You’d think Woodside, the home of Larry Ellison, would be first on the block to get it,” he said. His parents, who live in Atherton, still can’t get a connection, he noted.
The woes haven’t stopped Applied Materials Ventures from doing deals. But they see a new trend afoot: VCs have been so badly burned by the drastic fall in valuations for their companies, they’re preventing their companies from doing second rounds of funding. They’re too painful.
When companies go out to raise a second round (also known as a Series B), the first-round VCs get wiped out because the new VCs — supplying the second round money — insist on terms that lower the ownership stakes of first-round investors. “Series B is the cemetery of venture capital,” said Nguyen. “We call it the Series B massacre.”
Last year, 60 percent of all second rounds were so-called “down-rounds,” where valuations were dropped and existing venture capitalists saw their ownership stakes dwindle. No longer willing to take that risk, Applied Materials and other VCs require a company to raise between $25 and $40 million in their first round, and they’re expected to last on that forever.
That forces start-ups to burn up time on the road, building a syndicate of VCs willing to cough up so much money. Some entrepreneurs say it isn’t worth it. Other entrepreneurs, Applied’s Diner admits, are funding start-ups with their own money.
CONWAY CONTINUED: Turns out that Angel Investors, the struggling venture firm started in 1998 by Ron Conway, and covered last month in Termsheet, came up with another innovation during the boom. Partner Casey McGlynn apparently also retained his job at Wilson Sonsini Goodrich & Rosati all along, and billed companies that Angel Investors backed for work he did in helping them raise money.
One executive at Olliance said he was surprised when his company received a bill for $300-plus an hour from McGlynn. McGlynn, active again on the investing circuit, didn’t respond to a request for comment. Neither did Wilson Sonsini.
Term Sheet — a name drawn from the formal proposal that a venture capitalist offers to an entrepreneur — is a biweekly column published on Thursday about venture capitalists and the companies they fund. To read this column online, see www.siliconvalley.com/mld/siliconvalley/business/columnists/mattmarshall. Contact Matt Marshall at [email protected] or (415)477-2518.
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