Survey shows venture-funding free fall

Venture capital investments in network start-ups are free falling, having plummeted more than 40% to a two-year low of $US7.15 billion in the first quarter, according to a new study.

          Venture capital investments in network start-ups are free falling, having plummeted more than 40% to a two-year low of $US7.15 billion in the first quarter, according to a new study.

          The quarter-to-quarter decline of $US5 billion raises concerns that the venture capital industry downturn that began a year ago has yet to bottom out. These figures are from a special analysis of a PricewaterhouseCoopers and VentureOne MoneyTree survey conducted exclusively for Network World (US).

          All segments of the network industry - business services, software, hardware, broadband, wireless and fibre optics - suffered declines. Altogether, 478 network start-ups received an average of $US14.9 million each in the first three months of this year. In comparison, 751 network start-ups received an average of $US16.4 million each in the previous quarter.

          "We're returning to a more normal, historic level of investing,'' says Tracy Lefteroff, global managing partner of the Venture Capital Practice at PricewaterhouseCoopers. "The first quarter of 2001 is the lowest since the second quarter of 1999.''

          The first quarter of 2001 was down 64% from the first quarter of 2000, which was the pinnacle of internet investing. In that record-breaking quarter, $US20 billion was invested in network start-ups.

          "Internet investment is dropping rapidly. Even an area that has been extremely hot such as internet infrastructure had a rough quarter,'' says Dave Witherow, CEO of VentureOne. "Being internet-oriented is not a point of differentiation anymore. . . . Venture capitalists are evaluating the businesses as businesses on their own merits.''

          The good news for entrepreneurs is that plenty of capital is available, although fewer deals are being signed. In fact, the 10 largest deals of the quarter all topped $US90 million. These include a whopping $US350 million investment in MetroPCS, a Dallas provider of wireless personal communications services, and $US175 million invested in Telseon, which provides gigabit-speed data services.

          "It has not been a very good climate to raise funds,'' says Robert Ott, CFO at Multiplex, a New Jersey photonic component manufacturer that raised $US105 million from investors led by Credit Suisse First Boston. "This is clearly a great feat that we've pulled off in this unstable market and economy.''

          Ott attributes Multiplex's financial success to the fact that it is already shipping components and generating revenue. Multiplex will use the additional funds to increase manufacturing capability.

          One area still popular with venture firms is high-speed, metropolitan-area networks. An example is IntelliSpace, a New York provider of broadband internet access to commercial customers.

          Founded six years ago, IntelliSpace built a profitable business wiring New York office buildings with high-speed Ethernet technology. Last quarter, IntelliSpace raised $US45 million in cash to expand in 14 additional cities.

          "We were as successful as we were because we've demonstrated our ability to do this in a market,'' says Jeff Allen, president and CEO of IntelliSpace. "We already have 30,000 business users and 1700 corporate customers.''

          Allen expects investors to remain interested in companies that address the last-mile problem with alternatives to DSL and wireless technologies, which are proving too capital- intensive to sustain.

          "Companies like us that have a very strong economic model and don't need a long period of time between funding and bringing back positive cash. Those kinds of companies will get funded,'' Allen predicts.

          The survey showed several other trends:

          • Fewer investments are being made in early-stage companies, with the number and size of seed and first-round investments dropping by half.
          • Equity financing by corporations has fallen off dramatically, representing only a fraction of the amount invested last year.
          • More companies are turning to investment bankers rather than venture capital firms to lead later rounds of financing.
          This quarter's survey represents a restating of previous quarters to include a broader definition of equity financing that includes private placement equity, corporate investing, and certain other private equity in venture-backed companies.

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