Unlicensed Spectrum and the Challenge of Finding Investment Capital

White spaces use is becoming increasingly visible way to use spectrum more efficiently and jumpstart the use of new services. However, the industry will need significant investment in order to build a substantial industry. Traditional telecom service providers have FCC spectrum licenses that can serve as collateral for investors. White space service providers don’t have these licenses, making the investment case somewhat different and, in some respects, a bit more challenging.

The issue of not having licenses has two impacts on investors. First, the white space service providers do not have the valuable license to help collateralize an investment. Without the licenses, loans to white space service providers would, in general, be more risky. Without other assets or proven cash flows, loans may be nearly impossible to get. On the other hand, users of unlicensed spectrum don’t need to bid for, buy, lease or a license either, potentially reducing their capital needs. The most significant challenge in finding equity investment is that a lack of license reduces barriers to entry for competitors in the industry. If a white space operator is successful, it’s easier for competitors to enter their market and lower prices.

Lots of successful businesses operate with low barriers to entry: restaurants, systems integrators, many websites etc. But most of those businesses can be started on a shoestring with minimal investment from friends and family, and then find growth investment once profitable. White space services companies, however, will often need considerable capital at an early stage to build out their networks, but customer equipment etc.

Normally such early stage money would come from venture capital firms. But venture capital firms are typically looking for companies that will give them a potential home run, not merely a reasonable return. They generally expect many, if not most of their portfolio companies to fail. They hope for a few investments that will provide gigantic returns to make-up for the losses in the others. This is why they often invest in companies with legal protection from competition such as companies with biotech patents, technology patents or licenses. With low barriers to entry, it will be hard for white space operators to make a case they can deliver potential for home runs. The other major sources of equity financing, private equity firms, are not as focused on such home runs. But they typically invest in later stage companies that have strong cash flows they can borrow against. They can get a strong return by leveraging their investment. Unfortunately, white space startups are rarely in this position either.

Given the lack of licenses or cash flow, white space startups will likely have to focus on other creative ways to develop barriers to entry. For example, they could try to get long-term customer contracts, exclusive relationships with key distribution partners, or even use proprietary equipment standards. The players in the industry who are best positioned to raise institutional funds are the equipment provides who have valuable proprietary technology. Service providers would be well advised to seek alliances with trusted equipment providers to assist with their financing. Of course, in the white spaces industry, many of the equipment providers are seeking funding themselves. It won’t be easy, but creative solutions are possible.