Funding for network firms drops below US$1 billion

Venture capital investments in network companies have dropped below US$1 billion in a quarter for the first time since 1996, according to a consulting firm.

Even in the years immediately following the dot-com bust, quarterly investments in U.S. networking vendors never fell below $2 billion. But in the first three months of 2009, investors gave only $935 million to companies in this category, according to data provided to Network World by Pricewaterhouse Coopers (PwC) and the National Venture Capital Association, authors of the quarterly MoneyTree Report.

All figures are in U.S. currency.

The network funding totals reflect a nationwide drop in venture capital investments. In all industries, venture capitalists gave $3 billion to 549 companies during the first quarter, down from $5.7 billion spread over 866 deals in the last quarter of 2008.

"The numbers look pretty grim for [the networking] sector," says Tracy Lefteroff, a global managing partner of Pricewaterhouse Coopers (PwC).

Investment in network companies totaled $1.9 billion in the fourth quarter of 2008, and $2.7 billion in the first quarter of that year. Each quarter, MoneyTree authors provide Network World with a special data cut comprised of investments in computer software, hardware, peripherals and services; data, Internet, satellite and wireless communications; Internet software, e-commerce, digital imaging, computer graphics and other network-related technologies.

Not since the first quarter of 1996 have investments in network vendors fallen below $1 billion. In the run-up to the dot-com boom, quarterly investments routinely topped $10 billion. From 2002 to 2007, investments settled into the $2 billion to $3 billion range each quarter.

But a new low for this decade was reached in the first quarter both in terms of dollars and in the number of deals. The $935 million was invested in 206 companies. That's less than half the total from the second quarter of 2008, when there were 417 deals; and the lowest total since the third quarter of 1995, when just 180 network companies received investments.

Even during the dot-com bust, investment totals were higher than today because VCs were giving follow-on funding to a number of start-up and seed-phase vendors, Lefteroff says. Today, the majority of funding is going to expansion and later stage companies, with few investments in true start-ups.

"If you look at seed-stage investments, there is almost nothing," Lefteroff says.

In Q1 2009, just eight network companies in the start-up/seed phase received funding, gaining a total of $8 million. For the entire year in 2008, VCs gave $256 million to 106 start-up/seed companies.

Among all network investments in the most recent quarter, the eight largest went to later stage companies. Topping the list was Quadriserv, a software vendor that received $34 million. Semiconductor firms Maskless Lithography and Plastic Logic took the number two and three slots with $23 million and $21 million, respectively.

The next ten biggest network investments went to Copan Systems; Sepaton; Transera Communications; Enpirion; Stretch; Exalt Communications; Pliant Technology; TradeCard; Vidyo; and an undisclosed firm. Each of these companies received between $15 million to $18.5 million in funding.

Storage company Fusion-io recently landed $47.5 million in funding, but the deal was announced after the end of the first quarter.

Related Content

Sierra Wireless secures deal down under
Australian manufacturer NetComm will use Sierra Wireless’s Empowered embedded module in its Turbo 7 Series gateway. Read about the security features

Study Federal wireless net at high risk of failing
A new report by the inspector general of the U.S. Department of Justice concludes that an ambitious, multi-billion dollar federal wireless network faces a 'high risk' of failing to be achieved. After nearly six years of work, and spending by the DOJ alone of US$195 million, there is little to show, according to Inspector General Glenn Fine.

Net infrastructure for the long run
When we make major infrastructure purchases, we like to know that the choices we’ve made are smart ones — good for the long run. But the long run in my headline refers to another issue — the capability of a device to run for weeks or months without seizing up or experiencing degraded performance or loss of features. It is an issue that seems finally to be getting the recognition it deserves.