Low and No-Show of Venture Caps at AWS Auction Part of a Trend

Sharon Armbrust | October 07, 2006, 03:31 PM

Bemoaning the low returns available in a venture cap industry awash with funds, Sevin Rosen, the highly respected and visible venture capital firm that has been a sought-after investment vehicle for its 25 year history, announced 10/6 that it was scrapping its latest (10th) Fund and returning the $250-300 mil. which had already been committed by investors for that Fund.

Why? Because of what it described as “a terribly weak exit environment”—few IPO opportunities and too low takeout prices in the private market to yield the returns its investors demand.

That last point highlights one of the issues that kept venture caps at a distance from the recent FCC auction for AWS spectrum—a venture cap-unfriendly environment that would likely lower vc returns. The irony is that the spectrum went at historically low prices, but the beneficiaries were a dozen large winners (out of 166 in the race), who walked away with a ton of spectrum.

The FCC changed the rules for Designated Entities--small business which could get a 15-25% discount on their bids if they met the small biz criteria and followed some new holding rules. Those new rules became a sticking point for DEs to attract financing.

The FCC extended the holding time for DE licenses from five to 10 years. Most venture capital entities need and want to turn their investments in about five years. And the FCC limited the wholesaling of spectrum by DE license owners to <50% of their spectrum. That took away a potentially attractive business model for entrepreneurial license holders who might have wanted to build-to-suit for a single tenant or act primarily as a wholesaler of mobile broadband services to a variety of customers.

The data below show the small business buyer activity in the last four FCC auctions of spectrum similar to cellular/PCS spectrum.

In Auction #66 (1.7-2.1 GHz - 9/06) DE winners bought 1.3% of the purchased spectrum
In Auction #58 ( 1.9 GHz - 2/05) DE winners bought 10.1% of the purchased spectrum
In Auction #44 (700 MHz - 9/02) DE winners bought 10.9% of the purchased spectrum
In Auction #49 (700 MHz - 6/03) DE winners bought 31.0% of the purchased spectrum