Survey shows network start-ups still hot, hot, hot

Venture capital investments in network start-ups reached an all-time high. Second quarter funding was nearly triple what it was a year ago, according to a study.

The findings come from the quarterly PricewaterhouseCoopers/Network World Venture Capital Survey.

More than 300 start-ups offering communications services, software and hardware received just over $US3 billion in funding, with the average investment topping $10 million. The network sector garnered about 40 per cent of the total venture capital investment in the US during the second quarter. Altogether, venture capitalists pumped $7.67 billion into about 1000 US companies, up from $4.31 billion in the first quarter.

For enterprise customers, the venture capital study demonstrates how dynamic the network industry is. Record-setting investments in network technology mean that many new and innovative products will be getting to market in the next 12 to 18 months.

Most of the network investments were tied to the internet either directly, such as in ISPs or electronic commerce software, or indirectly as in higher bandwidth technologies needed to accommodate internet traffic. "At least $2 billion of the $3.184 billion invested in networking is directly or indirectly influenced by the internet," says Kirk Walden, national director of venture capital research for PricewaterhouseCoopers.

Network investments increased the most of any category in the study, which also tracks quarterly venture capital funding for companies in such fields as biotechnology, computers, environment and medical technology.

"It was a staggering increase," says Walden, who predicts that during the third quarter venture capital activity in network companies will return to normal levels in the $4 billion range. "This is a watershed quarter. It's not a sustainable level of venture capital activity."

Over the last several quarters, venture capital investments in networking have continued to set new records. For the first half of this year, network-related investments reached $5.56 billion, compared to a total investment of $5.2 billion during all of 1998.

For the second quarter, the largest single investment in the network area went to Via Net Works, a US-based ISP that serves Latin America. Via Net Works received $128 million from 12 venture firms in its third round of funding.

One technology that continues to benefit from venture capital investment is wireless communications. A total of 17 wireless companies received $226 million in funds to develop wireless services ranging from broadband to video over wireless to wireless internet appliances. The largest wireless investments were: $91 million in Metawave Communicationsin Washington, which is a provider of spectrum management systems for wireless service providers; $24 million in Wavtrace of Washington, which develops point-to-multipoint wireless broadband access systems; and Time Domain oin Alabama, which received $20.4 million to invest in its ultra-wideband wireless technology.

Another hot area for investment was digital subscriber line (DSL) technology. Among the DSL companies that raised funds last quarter were: DSL.net, of Connecticut, a provider of DSL services to smaller cities, received $40 million; Jato Communications, a data communications DSL provider from Denver, received $20 million; and New Edge Networks, a DSL carrier from Washington, received $15.3 million. Overall, 11 DSL companies received a total of $189 million to bring a range of offerings, including in-building and wireless services, to market.

Six companies with products that integrate voice and data over the internet were also targeted for investment, receiving a total of $63.3 million. Intergral Access and MSHOW.com received the biggest investments. Integral Access of Massachusetts, a maker of packet-based telecomms access systems, received $15.5 million. MSHOW.com of Colorado, which provides telephone services over the Internet, received $14.3 million.

Another popular area for investment was business-to-business e-commerce sites and services. For example, Centerbeam of California, which provides internet services for small businesses, received $20 million in its first round of funding. Other start-ups in this area that got seed funding are Branders, also of California, which received $2 million, and Conduit of California, which received $1.3 million.

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