January 17, 2001, 11:49 AM — Venture capital funding in network start-ups declined for the first time in 18 months, dropping 13% from a record-breaking $15 billion in the second quarter of 2000 to $13.1 billion in the third quarter, according to the most recent PricewaterhouseCoopers/Network World Venture Capital Survey.
Despite the downturn, third-quarter investments remained slightly higher than in the first quarter and more than double the amount spent in the third quarter of 1999. Altogether, 870 network hardware, software and services start-ups received an average of $15 million each during July, August and September.
Much of the decline was related to dot-coms, with investments in Internet content, e-commerce sites and related services plunging $2.2 billion -- or 30% -- from the previous quarter. Among the start-ups that had trouble attracting funds were business-to-consumer e-commerce sites, business-to-business e-commerce sites and consulting firms offering Web site design.
However, venture firms remain optimistic about network equipment, with investments in this segment more than doubling to $2.48 billion. Indeed, half of the third quarter's 10 largest deals were for fiber-optic equipment, while the other half were for Internet collocation facilities and service providers.
Fiber optics "is hotter than a pistol," says Kirk Walden, national director of PricewaterhouseCooper's MoneyTree survey. "When you're talking about laying fiber-optic cable or building a piece of optical equipment, you're talking about notably more money than you need for software or services."
Interest in a safe bet
Bill Collatos, co-founder and managing general partner with Spectrum Equity Investors, says venture firms are interested in Internet infrastructure start-ups such as fiber-optic and wireless companies because they seem like a safer bet than content or e-commerce providers.
"If you think of this entire space as a network . . . what you find is a lot of traffic always runs over the core, regardless of whether some small tributary of the network is slowing down," Collatos says. "There's more reliability in the infrastructure opportunities, in the hardware and software that actually manage the network."
With hot areas such as fiber optics picking up the slack for weak areas like e-commerce, Walden predicts that year-end figures will show network investments in 2000 being twice the amount made in 1999.
"We are sticking to our guns on the prediction that we made earlier this year . . . that overall venture capital investments are going to double to $70 billion in 2000, compared with $35 billion in 1999," Walden says, adding that the same trend will hold true for the network segment of the economy, which should reach $46 billion by year-end.