* U.S. VCs pumped $562 million into telecommunications start-ups in Q2
U.S. venture capital firms invested $562 million in telecommunications start-ups in the second quarter of 2005 – the largest investment in this segment of the high-tech economy in two years.
Indeed, telecommunications ranked third in terms of venture capital investments last quarter after software and biotechnology, according to the MoneyTree Survey compiled by PricewaterhouseCoopers, Thompson Financial Venture Economics and the National Venture Capital Association.
Overall, venture capital firms invested $5.775 billion in high-tech start-ups in the second quarter of 2005. Of that amount, $1.279 billion went to software companies and $1.122 billion went to biotechnology companies.
The $562 million invested in telecommunications represented 50 deals, ranging in size from $50,000 to just under $200 million. Telecom investments were up 54% over the first quarter of 2005, when venture capital firms invested $364 million in this segment.
VoIP carrier Vonage received $199 million in its sixth round of financing, which was the second largest venture capital deal of the quarter. Vonage has raised a total of $393 million since the second quarter of 2001.
Other major telecom deals in this quarter include: $35 million invested in SOMA, a San Francisco wireless service provider; $30 million invested in Motricity, a Durham, N.C., mobile content provider; and $18.5 million invested in Mintera, a Lowell, Mass., provider of Internet backbone infrastructure.
“The telecom sector is being driven by wireless and Internet communications,” says Kirk Walden, national director of venture capital research at PricewaterhouseCoopers. “With regular telecommunications, there is nothing going on.”
Walden says that the Vonage investment is notable because this start-up could have used an IPO to raise money but instead chose venture financing.
“It’s clear that Vonage doesn’t want to be held to quarterly earnings reports,” Walden says. “The management wouldn’t have given up that much stake in the company if it weren’t for a fundamental strategic decision about how they want to spend that money. They will not have to worry about profitability by getting the venture money like they would if they had gone to the public markets.”
Walden says that Vonage’s approach is a flashback to the late 1990s, when Internet start-ups raised huge sums of venture capital financing and spent it on gaining market share rather than achieving profitability.
“It is true in any industry that the first or second guy to achieve dominant market share wins,” Walden says. “Vonage was a smart financing play. Many people in the industry are positive about that deal.”
