Venture capital investment in network technology companies has hit its lowest point in a decade, and one expert says it might get worse.

Investors are wary of investing in start-ups because they have poured millions of dollars into existing companies that have not yet provided liquidity in the form of IPOs or mergers and acquisitions, says Tracy Lefteroff, a global managing partner of Pricewaterhouse Coopers (PwC).  (View a slideshow of recent mergers and acquisitions.)

"I couldn't point to anything that's done really well [in the networking sector]. The whole space is suffering," Lefteroff says. "If [investors] don't see liquidity on the horizon it's going to be tough to justify funding a lot of new companies in this space."
Lefteroff predicts that the number of deals and dollar amounts will continue to drop.

Click to see: A list of venture capital deals

Venture capitalists in the third quarter invested $2.07 billion in 328 networking companies, including makers of hardware, telecom products, network-related software and Internet-related technology, according to data provided to Network World by PwC and the National Venture Capital Association, authors of the quarterly MoneyTree Report. That's the lowest quarterly total since 1998's first quarter, when investments were just less than $2 billion. It's also the fewest number of deals in any quarter since 1996.

Investments soared during the dot-com boom, surpassing $15 billion in each quarter during 2000. Venture funding became much scarcer after the bubble burst, but investments generally remained steady at between $2.5 billion and $3 billion per quarter each of the past five years.

Third-quarter investments dropped almost a full billion compared with last year's third quarter, when 411 deals accounted for just more than $3 billion. The latest numbers also show a precipitous drop since this year's second quarter, when 408 deals totaled $2.75 billion.

The current economic crisis is clearly limiting the amounts of money available from venture capitalists. What's most worrying for young companies is that investors are being forced to continue pouring money in late-stage companies that have not yet been acquired or gone public, leaving less money for true start-ups. The top ten networking deals in the third quarter all went to late stage and expansion companies. The 11th biggest deal went to an early stage company, Jasper Wireless. You have to go all the way down to the 85th biggest deal to find one that went to a company in the start-up/seed phase — Schooner Information Technology, a data access company led by veterans of Sun Microsystems.