Venture funding continues downward spiral

By Bob Brown
May 2, 2003

About the best thing that can be said about the latest numbers on network and software industry venture-capital investing is that they are still bigger than in most other industries.

Software remained the leading industry with $790 million invested in 166 companies during the first quarter, down 13% from fourth quarter, according to the PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey.

Telecommunications remained the number three industry with $485 million invested in 67 companies, down 11% from the fourth quarter. Networking followed as the fourth-biggest category, with $430 million going to 38 companies, according to the survey.


Overall venture funding in the first quarter added up to $3.8 billion in 623 companies, down from $4.3 billion in 726 companies in the fourth quarter. The first-quarter dollar amount was the lowest quarterly funding total in five years, the survey showed. The number of companies invested in was the lowest in six years.

Venture firms invested in 158 early-stage companies, about the same as in the fourth quarter, the survey said. There was a slight uptick in investing in late stage companies, those that venture firms aren’t ready to give up on but that don’t have immediate exit strategies, such as going public or getting bought.

Given IT spending cutbacks by enterprises and carriers, VCs have become more cautious in general about investing in network start-ups. The poor economy and concerns about the war haven’t helped.

In a statement, Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said: “The reality is that venture capital will not lead the economy out of this slump. It will follow it out. Restoration of global stability appears to be underway. But, until the public markets and liquidity opportunities show signs of sustainable improvement, venture capital will not rebound.”

This is all not to say that venture capitalists have gone into hiding. William Quigley, a managing director with Clearstone Venture Partners in Santa Monica, Calif., took in this week’s NetWorld+Interop 2003 in Las Vegas to scout out interesting companies and technologies.

“I find voice over 802.11 wireless LANs intriguing; there are opportunities but also problems to solve in that area,” he said. “Companies could save themselves a lot of money on cell phone calls.”

Quigley also cited multifunction security boxes as promising.

Ipsum, a Philadelphia-based start-up selling net management appliances, is among the relatively few network companies to get funding recently. It secured $6 million in second-round funding from Rho Ventures and Sevin Rosen Funds; the company announced $1.5 million in seed funding in August of 2001.

Frank Hayes, the company’s vice president of marketing and business development, says Ipsum was able to secure funding largely by differentiating its technology from other management vendors. Ipsum's products, a server and probes, are designed to monitor routing protocols to detect faults and gauge service levels. The trick now is staying lean -- the company has just 20 employees -- while ramping up for May general availability of its products. One way the company accomplished that was by doing the rounds at Interop, but without renting a booth

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