Survey shows venture-funding free fall

Venture capital investments in network start-ups are free falling, having plummeted more than 40 percent to a two-year low of $7.15 billion in the first quarter, according to a new study.

The quarter-to-quarter decline of $5 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.

All segments of the network industry -- business services, software, hardware, broadband, wireless and fiber optics -- suffered declines. Altogether, 478 network start-ups received an average of $14.9 million each in the first three months of this year. In comparison, 751 network start-ups received an average of $16.4 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 percent from the first quarter of 2000, which was the pinnacle of Internet investing. In that record-breaking quarter, $20 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 $90 million. These include a whopping $350 million investment in MetroPCS, a Dallas provider of wireless personal communications services, and $175 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 $105 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.

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