Network startup funding stuck in neutral

Venture funding remains strong for networking, telecommunications companies

While venture funding across industries broke out of its long-held range to top $US7 billion during the first quarter, investments in network-related companies are holding steady at the quarterly rate of roughly $US2 billion to $US3 billion.

Life sciences is the hot area of the moment, but the good news is that investments in network-related start-ups aren't on the decline, says Tracy Lefteroff, global managing partner of PricewaterhouseCoopers' venture capital and private equity practice. According to the quarterly MoneyTree Report, compiled by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson Financial, network-related companies received $US2.5 billion in venture funding during the first quarter, up slightly from $US2.4 billion the previous quarter but down from the $US2.8 invested during the first quarter of 2006.

The report defines network-related companies as those from such market segments as security, wireless, networking, telecommunications, Internet and software.

"Networking deals have reached a pretty steady equilibrium," Lefteroff says. That situation is expected to at least not worsen given that some recent successful IPOs from network and telecom companies have investors believing that these market segments once again are good bets for their dollars. That goodwill -- plus the general belief that vendors coming through the downturn earlier this decade have emerged stronger than ever -- make for a positive investing climate, he says.

Another positive sign for those investing in enterprise IT companies is "the emergence of the billion-dollar valuations [of public] companies that we haven't seen in a while," says Ullas Naik, managing director with Globespan Capital Partners. "Given that VCs and entrepreneurs are glass-half-full people, they have a tendency to see that as a portent of [what is] to come, especially if they see a consistent trend upward of public-company valuations."

First-quarter investments in software companies fell 10 percent from the same period last year to $US1.1 billion, but was still the second-largest sector overall in terms of dollars, according to the report. Media and entertainment companies were once again high on investors' lists, with $US489 million invested in companies in this sector during the first quarter.

Investments in telecom companies grew 27 percent over the previous quarter with $US588 million invested in 63 deals. As in the past, wireless companies saw more than half of this amount, attracting $US356 million.

Internet-specific companies -- which the report defines as those with a business model that fundamentally depends on the Internet -- received $US1.3 billion in first-quarter investments, up 31 percent compared with the amount invested during the same period last year to hit a five-year high.

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