Third-quarter investments fund next-gen Internet

Four of the 10 largest venture-capital investments made during this year’s third quarter were for telecom companies offering the infrastructure and technology needed to fuel the next generation of Internet-based applications and services.

These top deals highlighted a record quarter for telecom start-ups, as the sector saw $848 million in investments -- the most venture-capital activity since the second quarter of 2002, according to the MoneyTree Report, based on data from Thomson Financial, issued Tuesday by PricewaterhouseCoopers (PwC) and the National Venture Capital Association.

“What really drove [the telecommunications sector’s] growth was wireless and Internet communications,” says Tracy Lefteroff, global managing partner of PwC’s venture capital and private equity practice. “About 42% of the investments were in expansion-stage companies, and some of these companies appear to be doing quite well.”

The big telecom winners in the third quarter were Limelight Networks, which operates a digital media content distribution network, garnering $130 million; Boingo Wireless, which aggregates and offers Wi-Fi connectivity to other service providers, received $65 million; Handango, provider of mobile download services and software, attracted $61 million; and Visto, which develops mobile messaging products for operators, gained $51 million.

These companies and others are putting the building blocks in place for content owners to go directly to consumers with their goods, skipping intermediaries, such as television networks.

“One trend that affects these sectors is digital media convergence; think about how video content shifts from the TV model to the on-demand model, and to mobile devices like iPods and wireless devices . . . there’s a lot of investment opportunity to build infrastructure for that,” says Axel Bichara, senior partner with Atlas Venture in Boston.

The software sector, which of all the technology markets, traditionally receives the most venture capital investment, saw a 19% drop from last quarter in the amount invested in these companies, to $1.09 billion.  That marked the lowest level of investment since 1996, according to the survey.

Overall, venture capital companies' funding in the third quarter dipped slightly from the second quarter, to $6.2 billion in 797 deals, according to the survey. The quarter also marked a trend toward investing in early-stage companies, however, at levels that haven’t been experienced since the Internet bubble of the late 1990s.

“The trend back to early-stage investment that we see not only in the [dollar figures] but in deal flow has been very healthy; it's a very good sign for the venture business and the economy as a whole, since technology start-up activity is a great driver for job creation,” says Bichara.