"We are slowing, methodically plateauing to a sustainable level of venture-capital investment," Waldden says. "But the bottom is not dropping out of this market."
However, the key statistics were down this quarter for network investments:
The number of deals dropped 9% from 960 in the second quarter to 870.
The average size of these deals declined 4% from $15.65 million to $15 million.
The largest deal of the quarter -- a $207.5 million investment in Internet data center operator Relera -- is about half the size of last quarter's $402 million investment in Carolina Broadband.
The 10 largest deals of the third quarter ranged from Relera's big prize to a $100 million investment in Chiaro Networks, a Richardson, Texas, start-up that's developing an optical router for Internet backbone carriers.
Fiber optic push
Investments in fiber-optic start-ups are expected to remain strong for the next few quarters because of several recent billion-dollar acquisitions by Nortel Networks and Cisco of companies building fiber-optic products.
"There used to be only a handful of players in fiber optics," says Tracy Lefteroff, managing partner of PricewaterhouseCoopers' Venture Capital Practice. "With the Internet deals slowing down, everyone wants in."
Lefteroff predicts the market for fiber-optic equipment will remain strong even though the stock values of most telecommunications carriers are down this fall, and big players such as AT&T and British Telecommunications are splitting up.
"The fiber-optics market is fundamentally more solid than many Internet investments," Lefteroff, says. "[Telephone companies] around the world are all going to modernize their systems [with] fiber optics because of the capacity advantage they can get."
That's what the folks at Chiaro Networks are banking on. Chiaro raised $100 million last quarter from 13 investment firms led by Polaris Venture Capital and Koor Corporate Venture Capital.
Chiaro is using this windfall to build a large Internet router that has an optical switch fabric and provides a large number of ports and fast speeds for backbone transmission systems. Chiaro plans to have beta-test systems available for customer trials next fall.
"The carriers and the market in general are still going to invest in infrastructure," says Ken Lewis, CEO of Chiaro. "The amount of Internet traffic is at least doubling every year . . . and that's a disruptive thing for carriers. If they don't keep up, they will lose to somebody else that has the capacity."
Lewis says Chiaro's router will let carriers provide a more reliable Internet infrastructure to corporate customers. He predicts the carrier market will remain strong for the next two years.