'Net fuels record VC funding

By CAROLYN DUFFY MARSAN
Network World, 02/21/00

Chalk it up as a year for the record books. Venture capital investments in network companies topped $11 billion in the fourth quarter of 1999, shattering all previous records and pushing the year-end total to $23.1 billion - more than quadruple the investments made in 1998.

These are the findings of the latest Pricewaterhouse-Coopers/Network World Venture Capital Survey, which not surprisingly found the Internet to be the engine driving most of this venture capital activity. The most popular choices for investments were business-to-consumer e-commerce sites, business-to-business e-commerce sites and high-speed Internet access providers.

Venture capital database
Search through a year's worth of data from the survey in a variety of ways.
VCs fund 'Net infrastructure
Flush with cash, venture capitalists are pouring money into start-ups developing products and services that bolster the Internet's infrastructure.

The fourth quarter was a record breaker in terms of the number of network companies that funded - 780 - as well as the amount of funding they received, which averaged $14.4 million. In contrast, during the fourth quarter of 1998, 113 companies received an average of $7.8 million each.

Year-end totals for 1999 were equally astonishing, according to PricewaterhouseCoopers, which conducts a quarterly survey of all venture capital investments and breaks out data on the network industry for Network World readers. All told, 1,945 network companies received an average of $11.9 million each. This compares with 880 network companies getting an average of $5.9 million each in 1998.

"1999 was a great year for our economy, and it stayed strong heading into the holiday season," says Steve Meisel, a global practice leader at PricewaterhouseCoopers. "We saw growth in the health of stocks for networking companies. Online shopping increased significantly, which demonstrated the strength of the Internet. All of this plays back to start-up companies having strong funding available to them. It just fuels the market."

The biggest deal of the quarter was a $280 million investment in CarsDirect.com, a Culver City, Calif., Web site offering online car purchases. Eight venture capital firms, including Idealab Capital Partners, were involved in this later-stage deal.

B2B bucks

In the area of business-to-business e-commerce, venture capital firms were attracted to vertical market exchanges as well as underlying software and services. Neoforma, a Santa Clara Web site offering medical supplies and equipment for the health care industry, raised $70.5 million in a later-stage round. Other vertical market Web sites that attracted attention were e-Steel for the steel marketplace, which raised $66 million, and Blue-Line/On-Line for the construction industry, which raised $41.5 million. Offering tools and services for building these sites are eBiz.net, an El Segundo, Calif., Web-hosting company that raised $60 million, and Asera, a Belmont, Calif., e-business service provider that raised $52.4 million. "The various business-to-business markets are getting staked out, and the company that can get out there first, go public and get a reasonably large market capitalization can then go back and build the business," says Judy Horton, director of research at VMS, which operates as AT&T Ventures. AT&T Ventures was one of seven companies that invested $53 million last quarter in the National Transportation Exchange, an online marketplace for buyers and sellers of trucking services.

"A lot of these business-to-business markets are very big and very fragmented, and they are well-suited to the kinds of efficiencies that the Web and XML have to offer," Horton adds. Among the industries she cites as good contenders for the business-to-business model are automobiles, agriculture and construction.

DSL a big draw

Another hot area for investment was broadband Internet access, including digital subscriber line (DSL) services for small to midsize companies, office buildings and homes. Corporate DSL and Web hosting service providers that received large investments include ConnectSouth Com-munications of Austin, Texas, which landed $100 million, and HarvardNet, a Portsmouth, N.H., company that received $70 million.

"We're seeing a lot of money going into DSL," Horton says. "A lot of companies are targeting multitenant buildings for the business customer. And we're also seeing equipment funded for voice over DSL. . . . Voice over DSL may be the way that packetized voice becomes viable and then migrates into the rest of the business world."

Other network companies attracting large amounts of funding include:

Makers of fiber-optic equipment and components. For example, Columbia, Md.-based Corvis, which sells optical routers for long-distance carriers, raised $213.4 million from three venture capital firms in its second round of financing.

Consulting firms specializing in networking and e-commerce. Enterprise Networking Systems, a Redwood City, Calif., consulting firm, raised $90 million - a sum unheard of only a year or two ago for a professional services company.

Network service providers, including ISPs, application service providers and communications service providers (CSP). One example of a CSP is Evoke, a Louisville, Colo., provider of Internet-based voice and videoconferencing services that raised $100 million last quarter in its third round of financing.

"We received that amount of money because the investment community understands that we're going through a significant transformation in the communications infrastructure," says Paul Berbarian, CEO of Evoke. He explains that from the end-user perspective there is no real difference between a telephone call on AT&T's or MCI WorldCom's network. But with the Internet, companies such as Evoke can provide new applications and differentiated services.

"The investment community believes that we are at a crossroads, that the telephone and Internet are coming together as one industry, and that we're positioned to take advantage of the first-mover position," Berbarian adds.

PricewaterhouseCoopers sees no slowdown in the venture capital community's interest in networking in the year ahead. "I think we'll see the same kind of activity in the first quarter of 2000 that we saw in the fourth quarter of 1999," Meisel says. "As long as the initial public offering market stays hot, I don't see anything that will diminish the venture capital activity."