Funding for network companies drops below $1 billion, first time since '96

Venture capital investments in network companies have dropped below $1 billion in a quarter for the first time since 1996.

Even in the years immediately following the dot-com bust, quarterly investments in U.S. networking vendors never fell below $2 billion. But in the first three months of 2009, investors gave only $935 million to companies in this category, according to data provided to Network World by Pricewaterhouse Coopers (PwC) and the National Venture Capital Association, authors of the quarterly MoneyTree Report.

The network funding totals reflect a nationwide drop in venture capital investments. In all industries, venture capitalists gave $3 billion to 549 companies during the first quarter, down from $5.7 billion spread over 866 deals in the last quarter of 2008.

“The numbers look pretty grim for [the networking] sector,” says Tracy Lefteroff, a global managing partner of Pricewaterhouse Coopers (PwC).

Investment in network companies totaled $1.9 billion in the fourth quarter of 2008, and $2.7 billion in the first quarter of that year. Each quarter, MoneyTree authors provide Network World with a special data cut comprised of investments in computer software, hardware, peripherals and services; data, Internet, satellite and wireless communications; Internet software, e-commerce, digital imaging, computer graphics and other network-related technologies.

Not since the first quarter of 1996 have investments in network vendors fallen below $1 billion. In the run-up to the dot-com boom, quarterly investments routinely topped $10 billion. From 2002 to 2007, investments settled into the $2 billion to $3 billion range each quarter.

But a new low for this decade was reached in the first quarter both in terms of dollars and in the number of deals. The $935 million was invested in 206 companies. That’s less than half the total from the second quarter of 2008, when there were 417 deals; and the lowest total since the third quarter of 1995, when just 180 network companies received investments.

Even during the dot-com bust, investment totals were higher than today because VCs were giving follow-on funding to a number of start-up and seed-phase vendors, Lefteroff says. Today, the majority of funding is going to expansion and later stage companies, with few investments in true start-ups.

“If you look at seed-stage investments, there is almost nothing,” Lefteroff says.

In Q1 2009, just eight network companies in the start-up/seed phase received funding, gaining a total of $8 million. For the entire year in 2008, VCs gave $256 million to 106 start-up/seed companies.

Among all network investments in the most recent quarter, the eight largest went to later stage companies. Topping the list was Quadriserv, a software vendor that received $34 million. Semiconductor firms Maskless Lithography and Plastic Logic took the number two and three slots with $23 million and $21 million, respectively.

The next ten biggest network investments went to Copan Systems; Sepaton; Transera Communications; Enpirion; Stretch; Exalt Communications; Pliant Technology; TradeCard; Vidyo; and an undisclosed firm. Each of these companies received between $15 million to $18.5 million in funding.