Venture capital investments in network companies and other IT vendors dipped during the third quarter, a traditionally slow period for such funding. A few sweet spots in the industry continued to attract most of the dollars.
According to a special slice of the data reported inthe MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association done for Network World, venture capitalists made 304 investments in IT companies totaling $2 billion during the third quarter. This is down from 409 investments tallying $2.7 billion in the second quarter but on par with the dollar amount of investments made in 2003’s third quarter.
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Four quarters of data from the survey.
For the purposes of this report, IT companies are defined as those in the computer, peripheral, IT services, networking and related equipment, semiconductor, software and Internet communications sectors.
Despite the third-quarter dip, venture funding in IT companies for 2004 is still expected to meet or exceed the $9.1 billion invested in 2003, according to Tracy Lefteroff, global managing partner, Venture Capital & Private Equity Practice at PricewaterhouseCoopers. Funding for 2004’s first three quarters comes in at about $7.4 billion.
VoIP service provider Vonage stole the spotlight during the third quarter with a $105 million deal. The company, which sells VoIP services to residential and small-business customers in about 125 markets in the U.S. and abroad, plans to use these funds to expand its service area, company officials say.
“That’s a pretty hot little area,” Lefteroff says of the VoIP market. It’s also a capital-intensive one, he adds, which might explain why Vonage’s third-quarter deal was more than three times the size of the next-largest deal.
As in the past, software investments dominated the third quarter, with 160 deals totaling $942 million. Of those investments about 20 went to security companies, such as patch-management vendor PatchLink, which received $30 million.
“Security is clearly overfunded as a sector,” says Asheem Chandna, a venture partner with Greylock Partners. “Having said that, when you talk to customers one gets the strong sense that the [security threat] is only getting worse . . . that means there are opportunities for new companies.”
Following software was the semiconductor sector, which attracted $331 million in investments during the third quarter. Money flowed into companies such as imaging processor maker Silicon Optix with a $40 million investment and Ember, which makes wireless chips and received $25 million.
Companies in the network and related equipment market saw $314 million in third-quarter investments, including optical gear maker Infinera with a $35 million investment.
Beyond Vonage’s hefty deal, investors only dabbled in Internet communications companies, putting $217 million into this sector. PolyServe, which makes system software for Internet data centers, saw a $20 million investment, as did Wayport, a wireless ISP.
