Venture-capital dollars flood into network equipment, dry up for telecom and Internet start-ups

Venture-capital investments in network companies during the second quarter hovered at the same level as first-quarter investments, although the sectors in which investors were most interested played a game of musical chairs.

Venture-capital deals made with network companies totaled $2.9 billion in the second quarter, according to a special slice of the MoneyTree Report done for Network World. PricewaterhouseCoopers and the National Venture Capital Association compiled the report based on data from Thomson Financial. Venture-capital investments in all industries tracked by the report totaled $7.1 billion for the second quarter.

See our slide show for more survey results, including lists of the start-ups receiving investments.

The report defines network companies as those from such market segments as security, wireless, telecommunications, the Internet and software.

The amount of money invested in network companies during the second quarter is up from the $2.7 billion invested in the first quarter but within the $2 billion to $3 billion range where this sector has hovered in the past few years. At the same time the amount of money invested in start-ups in general has continued to climb, putting 2007 on track possibly to be a record year, according to officials with the companies behind the MoneyTree Report.

With $1.5 billion poured into 248 deals, software regained its position as the largest category of the 17 sectors the MoneyTree Report tracks. Last quarter, software had fallen to the No. 2 spot, behind biotech, says Tracy Lefteroff, global managing partner of PricewaterhouseCoopers’ venture capital and private equity practice. Software winners include Coade, which makes engineering and design software, and Veoh Networks, which enables HD-quality programming over the Internet.

Network equipment companies also saw a boost in the second quarter, with $371 million invested, up from $284 million the previous quarter. For example, broadband access-system maker Calix Networks and WiMAX vendor Telsima both raked in $50 million or more. The telecommunications area, however, saw a significant fall to $476 million from $622 million in investments in the previous quarter.

The decline in telecommunications investments is in part because of the cooling off of the wireless market, Lefteroff says. “Last year there was a rekindling of interest, but now I think what’s happening is the [venture capitalists] who [invested] in this space are now sitting on the boards of those companies to help develop them, so we’re not seeing much new activity,” he says.

The same is true for Internet-based companies, Lefteroff adds, which also saw a dip in investment levels to $897 million during the second quarter, down significantly from the $1.4 billion invested in the first quarter.

Another shift in the second quarter was investor preference for seed and early-stage companies, after this year’s first quarter saw significant emphasis on investing in later-stage companies.

“There were a lot of early-stage deals getting done this past quarter because of the liquidity events; we’ve seen some IPOs and [mergers and acquisitions],” Lefteroff says. “Liquidity options always free up investors from portfolio companies so they can add new ones. With most of these venture guys, the gating factor is their time,” more so than available funds, he says.