Network, telecom funding drops off

With 2003 marking the lowest venture-capital investment levels for the network and telecom sectors in recent years, these categories could certainly benefit from an increase in corporate IT spending.

While large public companies such as Cisco Systems and Lucent Technologies say they are starting to feel the positive effects of rebounding IT budgets, smaller private companies in networking and telecom haven't yet experienced a significant uptick in sales. In addition, investors are still somewhat leery of these sectors after having poured billions of dollars into network and telecom start-ups in 1999 and 2000 only to be burned by most of them.

Telecom companies received US$2 billion in 259 deals last year, making it the third-largest sector for investments, behind biotechnology and software, according to the most recent PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey.

The survey defines telecom companies as long-distance providers, local exchange carriers, wireless service providers, component makers, and satellite and microwave service and equipment providers. Network companies, defined as makers of switches, hubs, routers and network management products, followed in fourth place with 180 deals, totaling $1.7 billion last year. While still significant, investments in these areas have fallen sharply from their historic highs of just a few years ago.

"I think we bottomed out" in 2003, says Tracy Lefteroff, global managing partner of PricewaterhouseCoopers' Venture Capital & Private Equity Practice, about the network and telecom sectors. "There's been a pickup in corporate IT spending, but it hasn't trickled down to the start-up level. (Large) networking companies haven't rebounded enough to make acquisitions, but we are starting to see movement."

In 2003, the majority of venture capital investments in these two categories went to improving existing portfolio companies that make VoIP, Wi-Fi and broadband products and services, Lefteroff adds.

While few predict, or even hope, that investments in telecom and network companies will reach the fevered pitch they saw in 2000, some say a rebound in investor interest is on the way as solid companies start to release innovative technology.

Networking and telecom "are probably the most attractive spaces right now," says Harry Weller, a partner at venture capital firm New Enterprise Associates, which has about 30 percent of its current fund invested in these types of companies. "There are low valuations and good opportunities that we haven't seen in a long time."

For the fourth quarter of 2003, network companies that make fiber-optic equipment continued to attract the attention of venture capitalists, including switch maker Luminous Networks Inc., which received a $26 million injection. CloudShield Technologies Inc., which makes security devices for fiber-optic networks, and optical switch maker Calient Networks Inc. each received $20 million in funding.

Telecom investments for the fourth quarter included Grande Communications' $45 million and VoIP carrier Vonage Holding Corp.'s $35 million.

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