VCs pour $3 billion into network start-ups

Wireless, software among biggest winners, quarterly venture capital survey finds.

Venture capital firms continue to make a steady stream of investments in network start-ups, particularly software, Internet and wireless technologies.

During the second quarter, VCs invested just under $3 billion in network start-ups, completing 423 deals nationwide. This follows on the heels of $2.8 billion invested in 399 network start-ups during the first quarter.

Overall, early-stage investments in the network industry are holding steady. For the last eight quarters, VC investments in network hardware, software and telecommunications services have ranged between $2.5 billion and $3 billion, with anywhere from 350 to 435 deals completed.

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Venture capital firms continue to make a steady stream of investments in network start-ups, particularly software, Internet and wireless technologies.

During the second quarter, VCs invested just under $3 billion in network start-ups, completing 423 deals nationwide. This follows on the heels of $2.8 billion invested in 399 network start-ups during the first quarter.

Overall, early-stage investments in the network industry are holding steady. For the last eight quarters, VC investments in network hardware, software and telecommunications services have ranged between $2.5 billion and $3 billion, with anywhere from 350 to 435 deals completed.

These figures are from the quarterly MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, which is based on data from Thomson Financial. Network World receives a special cut of the MoneyTree report that is focused on the network industry.

“We’ve seen a relatively flat quarter again,’’ says Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. “We haven’t really recovered from the meltdown following 2001.’’

At its peak in the second quarter of 2000, VCs invested $18 billion in network-related ventures.

Several factors are holding back network start-ups:

* Industry consolidation: Major telecommunications carriers such as AT&T and BellSouth have announced plans to merge, along with network hardware vendors Alcatel and Lucent Technologies. That means there will be fewer service providers to purchase network equipment, and fewer network equipment vendors to buy components.

* Top-heavy M&A market: Network industry merger and acquisition activity is focused on very large deals. VCs are looking for more activity on the low end, with more small businesses getting acquired.

* Weak IPO market: Vonage, a once high-flying VoIP service provider, held its initial public offering this spring, and it was a huge disappointment. Network industry experts looked to Vonage as a bellwether to generate interest in the telecom area, but it has failed to do so.

Nonetheless, Lefteroff remains optimistic about the long-term opportunities for network start-ups.

“As Internet use continues to grow and as entrepreneurs continue to develop new ways to deploy some of the network capacity that was developed over the last few years, we will see some return to the activity levels we saw a few years back,’’ he says. “I don’t know when that will be. Everybody’s waiting to see what is going to be the next wave of new technology or use that’s going to re-kindle interest.’’

Software remains hot, with 187 deals completed in that area for a total of $1 billion. It was the largest single industry category, with many of the deals involving software-as-service start-ups that are dependent on the Internet.

Another strong area is Internet-specific ventures, where a company’s business model is dependent on the Internet. Start-ups in this segment captured $916 million in funding during the second quarter, and 143 deals were closed.