Putting one's money into the telecom sector seems to be hip again, some time Om Malik had a story about the return of the Telecom VC. Some of the fundings that came across my radar are the following ones:
- IPLogic, which makes its money by providing a mix of consulting, technology and managed services, received a capital infusion of $1.5 Mio. from DeltaPoint Capital and the New York State Common Retirement fund.
- Clarus Systems, a provider of testing solutions for the implemenation of IP telephony, received $10 Mio. from Trident Capital.
- SoundBite Communications, which provides a hosted, interactive voice messaging platform, pocketed $8.5 Mio. from Commonwealth Capital Ventures, North Bridge Venture Partners and Mosaic Venture Partners.
- RigNet is an interesting one with a very focused market: it provides communication services to oil drilling rigs and received $3.75 Mio. from HitecVision.
- Cisco's M&A machine is alive and kicking: Cisco acquired network analysis company NetSift for $30 Mio. in cash.
Especially the RigNet deal caught my attention, because RigNet is targeting a vertical market (like the one by VeriSign for the financial sector), which to me seems rather small, at least in relative terms: I would reckon that there are more banks than oil rigs in this world.
RigNet's service seems to be an example where IP-based communications go beyond offering a simple PSTN-replacement, but add real-value to a business system, at least by judging what's written on RigNet's website: their solution is compatible with rig instrumentation systems and has the ability to add service companies to the same system. So what actually happens is that business processes can be re-defined in a more efficient way.
Based on my initial thought of the limited market, I sifted through a number of broker reports to get at least a rough impression of how big the market could be (believe me, feels considerably different to reading reports from the telco sector...). I found one by Jefferies & Company from April 2005. According to the report ("The Jefferies Rig Weekly"), there are 876 oil rigs around the world as of February 2005, of which 253 are offshore (meaning that you might have to rely on a satellite link - but not necessarily, read this article about offshore rig communications).
For the heck of simplicity, I did a quick calculation (I am probably blatantly wrong with my assumptions, but at least it's a first guess). I simply assumed that there are a total of five companies in the market that offer services like RigNet, all equally strong, so RigNet would be capable of locking in 20% market share, or 175 oil rigs, of which roughly 50 should be offshore. So the HitecVision investment of a total of $3.75 Mio would translate into a $21,500 bet per oil rig - probably less than the average monthly communication bill of any rig, regardless if on- or offshore. Ignoring any capex, let's just say that the average monthly bill is $30,000 - $1,000 per day - comprising voice and data traffic and managed services, and that RigNet would be able to take out a 35% pre-tax margin, or $126,000 per year - 6x the inital investment (considering of course that all previous investments are sunk costs). Again, I might be completely wrong, and maybe somebody else has some better figures, but it seems like an attractive business to me.
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