Venture funding up, but not for network and telecom

While 2003 ended on a positive note for start-ups in search of venture funding, networking and telecommunications companies continue to lag behind other companies in attracting dollars.

According to the PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey released Tuesday, venture capital investments during the fourth quarter of 2003 reached US$4.9 billion in 679 companies, up slightly from the US$4.4 billion invested during the third quarter. A similar report done by VentureOne Corp. and Ernst & Young LLP showed 2003's fourth quarter logged US$4.5 billion, the highest amount of venture capital investments in more than a year.

Venture capital investments for the full year of 2003 totaled US$18.2 billion in 2,715 companies, according to the MoneyTree Survey, down from the US$21.4 billion raised in 2002. The VentureOne/Ernst & Young Venture Capital Report pegged 2003 investments at US$16.9 billion, down 20 percent from 2002. Despite this dip, John Gabbert, vice president of worldwide research at VentureOne says the fourth quarter's upswing as well as some recent successful initial public offerings by technology companies are creating a positive outlook for fundraising in 2004.

However, networking and telecommunications companies shouldn't expect a return to the flood of funding these companies experienced in 1999 and 2000. "What we're seeing today is that the drop-off (of funding in telecom and networking companies) has finally hit the bottom... We're really not seeing much new activity in that space," compared to what had become the normal level of investments over the past five or six years, says Tracy Lefteroff, global managing partner of PricewaterhouseCoopers LLP's Venture Capital & Private Equity Practice.

Investments in telecommunications companies for 2003 totaled US$2.0 billion, according to the MoneyTree Survey, or 11 percent of all venture investments. Networking companies attracted US$1.7 billion for the year, or 9 percent of all investments. At their highpoints in 2000, the telecommunications sector garnered US$18 billion in investments and networking companies saw US$11 billion.

"In the telecommunications industry there are signs of lingering overcapacity; valuations are still compressed and there's more consolidation on the horizon, so venture capitalists are taking a wait-and-see approach," Lefteroff says. "In networking, there's been a pickup in corporate IT spending, but it hasn't trickled down to the start-up level. And (large) networking companies haven't rebounded enough to make acquisitions, but we are starting to see movement."

At the ComNet Expo held in Washington, D.C., this week, Ernst & Young partner Bryan Pearce revealed a cut of the VentureOne/Ernst & Young Venture Capital Report that profiles investments made in telecommunications and networking companies for 2003 and 2004 to date. These companies represent the wireless, security, WAN, VoIP and data center sectors, and they received a minimum of US$500,000 in venture funding. During that period, 123 companies received such funding, with wireless equipment, connectivity and fiber-optic companies as well as wireless service providers attracting the most deals. As far as investors go, Intel Capital, Sevin Rosen Funds and NEA made the most investments in these sectors, Pearce said.

"It seems things bottomed out during 2003... and are starting to show a healthy pickup," Pearce says about fundraising overall. However, "for communications and networking companies, we're not completely out of the woods yet," he says.

Biotechnology companies attracted the most venture funding in 2003, followed by software makers, according to the MoneyTree Survey.