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Uncle Sam: Major VC for Optical Gear Development Indefinitely?

Where will the money come from to fund R&D for next generations of fiber optic equipment in the telecommunications and data communications markets? Clearly, the vendors will have enough trouble just keeping up with the changes on existing equipment in what are many cases relatively low-margin businesses – and will be quite hesitant to move ahead significantly on next-gen devices before they get an adequate return on their original investments, including 100G. Despite the heavy amount of cash going into silicon photonics, the increasingly pessimistic outlook for its future could easily result in the last straw for venture capital firms for an extremely long time, which almost assuredly to this day have not fully received their money back on devices at much lower speeds, including those systems operating at 10 megabits and at 10 gigabits.

Certainly, the situation of getting an adequate amount of capital is so dire that large enterprises have been forced to become financiers of optical component companies. However, in those cases, we are talking about very targeted, small amounts of cash that will hardly put a dent in the funding needs of the overall optical space moving forward. Despite the overwhelming obstacles and inefficiencies, there may be no other recourse than to rely on the US federal government, particularly DARPA (Defense Advanced Research Projects Agency), which has a hefty budget of close to $3 billion.

Federal spending is most useful to the commercial sector when it can benefit from the offshoots of technology initially developed for purely governmental purposes, such as NASA and the Internet. Government expenditures can also be essential for infrastructure building that would be prohibitively costly to be accomplished by private entities, including ultimately getting fiber to every person’s home in order for the country to remain competitive with other nations around the globe.

Yet, as we partially pointed out in our last blog article, national industrial models can be easily counterproductive, which has been amply demonstrated in Europe. For example, despite spending several billion dollars on JESSI (Joint European Submicron Silicon Initiative), the vendors on the continent made no additional penetration in the microelectronics business, notwithstanding substantial growth in the total world market between 1993 and 1995.

In the US, there are four major reasons for concern with such consortia:

  1. the distinct needs of the military can result in products that are unsuitable or cost-prohibitive for commercial purposes;
  2. the government bureaucracy cannot adjust quickly enough to changing market requirements;
  3. there is the logical assumption that corporations will be reluctant to provide their finest engineers or share proprietary technology; and
  4. as alluded to in the previous article, smaller firms, which can sometimes be the most innovative will be left out of the process.

Another increasing role for funding from Uncle Sam is its use in universities developing optical technology and spinning out companies. Naturally, there can be the problem with the “Ivory Tower” syndrome in that academics can easily fall in love with bleeding-edge solutions without an established practical use and/or economic justification.

[written by Mark Lutkowitz]

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