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Third-quarter venture capital funding down slightly
By Carolyn Duffy Marsan Venture capital funding in network start-ups declined for the first time in six quarters, dropping 13% from a record-breaking $15.015 billion in the second quarter of 2000 to $13.11 billion in the third quarter, according to the most recent PricewaterhouseCoopers/Network World Venture Capital Survey. Despite the downturn, third-quarter investments remained slightly higher than in the first quarter and more than double the amount spent in the third quarter of 1999. Altogether, 870 network hardware, software and services start-ups received an average of $15 million each during July, August and September. Much of the decline was for dot-coms, with investments in Internet content, e-commerce sites and related services plunging $2.2 billion - or 30% - from the previous quarter. Among the start-ups that had trouble attracting funds were business-to-consumer e-commerce sites, business-to-business e-commerce sites and consulting firms offering Web site design. However, venture firms remain optimistic about network equipment, with investments in this segment more than doubling to $2.48 billion. Indeed, half of the third quarter's 10 largest deals were for fiber optic equipment while the other half were for Internet collocation facilities and service providers. Fiber optics "is hotter than a pistol," says Kirk Walden, national director of PricewaterhouseCoopers' MoneyTree survey. "When you're talking about laying fiber-optic cable or building a piece of optical equipment, you're talking about notably more money than you need for software or services." With hot areas like fiber optics picking up the slack for weak areas like e-commerce, Walden predicts that the survey's year-end figures will show network investments in 2000 being twice the amount made in 1999. "We are sticking to our guns on the prediction that we made earlier this year...that overall venture capital investments are going to double to $70 billion in 2000, compared to $35 billion in 1999," Walden says, adding that the same trend will hold true for the network segment of the economy, which should reach $46 billion by year-end. "We are slowing, methodically plateauing to a sustainable level of venture capital investment," Walden says. "But the bottom is not dropping out of this market." All the key statistics were down this quarter for network investments: The 10 largest deals of the third quarter ranged from $207.5 million for Relera to a $100 million investment in Chiaro Networks, a Richardson, Texas start-up that sells data switches for optical backbone networks. Notable investments included $104.8 million for Pluris, an Internet backbone router manufacturer, and $109.1 million for NovaLux, which sells photonic lasers for fiber-optic equipment. Investments in fiber optic start-ups are expected to remain strong for the next few quarters because of several recent billion-dollar acquisitions by Nortel Networks and Cisco. "Venture firms have been looking at the exit values of a lot of fiber optic companies, and they looked at their own portfolios and realized they didn't have exposure in this area," says Tracy Lefteroff, managing partner of PricewaterhouseCoopers' Venture Capital Practice. "There used to be only a handful of players in fiber optics. With the Internet deals slowing down, everyone wants in." Lefteroff predicts that the market for fiber-optic equipment will remain strong even though the stock values of most telecom carriers are down this fall, and big players such as AT&T and British Telecommunications are splitting up. "The fiber-optics market is fundamentally more solid than many Internet investments," Lefteroff, says. "Telcos around the world are all going to modernize their systems to move away from hard wired backbones to fiber optics because of the capacity advantage they can get from fiber optics." Contact Senior Editor Carolyn Duffy MarsanOther recent articles by Marsan
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