Is Telecoms Infrastructure A Market Where Startups Can Thrive? It Depends On Your Approach

If government targets are met, around 85 percent of premises in the U.K. will have access to gigabit broadband by 2025. And things aren’t going too badly. According to a House of Commons briefing document, the current figure is in the region of 46 percent and it’s thought the 2025 goal will be reached or exceeded. It’s all part of the rewiring of the country for the next stage of digital transformation.  

The visible reminder that all this is happening is the constant presence of engineers working for BT Openreach – Britain’s biggest broadband provider – on the streets of our towns and cities but there is plenty of entrepreneurial activity too, with new companies emerging to offer ultra-fast fiber connections into homes, offices and factories.  

But it’s entrepreneurial activity of a particularly capital-intensive kind. Laying down fiber into premises is essentially an infrastructure project with all that entails in terms of resources and investment. Traditionally, infrastructure has been the province of major players such as BT and Virgin, so is it really feasible for new players to come into the market and scale-up in the face of well-established incumbents?

So when I got the chance to talk to Dana Tobak, co-founder of a fiber broadband provider, Hyperoptic, I was keen to find out how a business that started ten years ago with just a handful of staff has scaled to a level where it employs around 1,800 people and delivers broadband to a quarter of a million users.   

First Steps

 Before starting Hyperoptic, Tobak and co-founder Boris Ivanovic cut their broadband market teeth with a company called Be Broadband, which offered enhanced speeds. When the company was sold to O2 in 2006, the then-nascent high-speed optical fiber market was in the thoughts of the founders.  “After one of the meetings with O2, I remember Boris saying, we have to get into fiber,” Tobak recalls. “We knew fiber was coming. There was no question.”  

That reading of the market was crucial to the decision to press ahead with the launch of a fiber infrastructure play. A new product in a new market would have involved a different level of risk but there was, the founders believed, proven demand for faster broadband.  

Starting Small

Also crucial was the knowledge that it was possible to start small. Without getting too technical, gigabit broadband involves fiber going direct into premises (rather than to exchanges, with copper delivering the final part of the journey).  

So, Hyperoptic’s model was to proceed with one building at a time. “We concentrated on city centres,” says Tobak. “We focused on large residential blocks. We approached freeholders and asset managers and asked them if we could run fiber into their buildings.” 

Subsequently, the company approached property developers and today, in addition to freeholders and asset managers, it has relationships with around 250 builders.   

Raising Finance

The step-by-step approach was the key to scaling without massive investment. Initially, Hyperoptic was funded by cash from the Be Broadband sale and Tobak acknowledges the scale of the operation wasn’t necessarily interesting to specialists in infrastructure finance. “Typically they wanted to invest more capital than we wanted. They wanted bigger tickets,” she says.  

So, the company didn’t take investment until 2013. “Because we were going a building at a time,our spending was incremental and we had a very thoughtful investment policy,”  Tobak adds. 

The first investment, when it came, was a bit different from the usual VC round. In 2013, the company secured £50 million from a George Soros Quantum Fund vehicle, set up to provide financial backing over longer timelines. That was it until 2019 when private equity house KKR bought a majority stake for $500 million. 

The latter deal has enabled the company to progress beyond the building-by-building approach and over the last three years it has been developing its own area networks, with around 200,000 homes currently passed. “We want to get to a place where we can scale beyond that but we are not in the business of overbuilding,” says Tobak.

Tobak stresses that when taking investment the questions of “when” and “who” are very important. 

Competition

In many respects, Hyperoptic has focused on a strategy of addressing a niche within the broadband market rather than competing across the board. “We are now seeing a huge amount of competition – there is a lot going on in small towns and villages,” she says. For its part, the Hyperoptic has continued to focus mainly on city centers in order to keep the spending targeted. “What happens is that people can go nuts on infrastructure money that is not what we are about.”

Broadband is a complicated market, at least in terms of customer perception. Most British homes have now got superfast broadband and although “gigabit” is a step up from there, it’s debatable how many people actually know the difference, given that – even at relatively lower speeds, households can stream movies or music happily while doing all the necessary web browsing.  

But Tobak stresses that fiber offers benefits beyond download speeds – in particular stability and equal download and upload times. This she believes will drive the market.  “People are realising the benefits of connectivity.”  

Hyperoptic has grown from a stage where the whole team could fit into a meeting room to a situation where is has around 700 engineers on the ground in the U.K. and a large customer support team in Serbia. The success to date, says Tobak, is down to a number of factors. “It’s about timing, understanding the dynamics of the market and a degree of luck.”