Networking Start-Ups’ Comeback Continues

Networking Start-Ups’ Comeback Continues

July 27, 2005

By Cara Garretson

Three of the ten largest venture-capital investments made during the second quarter were in networking or telecommunications companies, continuing the renewed interest among VCs in funding a sector that has lagged dramatically in the last few years.

The second largest deal of the quarter was sealed by VoIP service provider Vonage, which attracted $200 million in its sixth financing round to date, according to the MoneyTree Report, a quarterly survey of venture capital investments performed by PricewaterhouseCoopers (PwC), Thomson Venture Economics and the National Venture Capital Association (NVCA). A financial services firm cut the largest deal of the second quarter.

Also ranking among the top 10 deals were switch maker Caspian Networks, which pulled in $55 million, and access equipment vendor Entrisphere with $50 million.

Such performance by networking companies marks the second quarter in a row that start ups in this segment are piquing investors’ interest. Many VCs got burned in the aftermath of the Internet bubble earlier in the decade, as once-promising telecommunications and networking start ups fizzled out because demand for their equipment and services all but disappeared.

This renewed interest is “in part pent-up demand, people literally spent nothing on new [networking] equipment for quite a few years,” says Shanda Bahles, managing partner with El Dorado Ventures, which invested in Entrishpere during the second quarter. “The applications driving this is the desire to put video, voice and data on the same network, that’s driving some investment in new equipment.”

Overall, investors put $5.8 billion in 750 companies during the second quarter, up from $4.9 billion in the first quarter. This isn’t surprising, says John Taylor, vice president of research with NVCA, since the second quarter traditionally sees more investment activity than the first.

The level of money pouring into private companies is at about the same level as what was experienced in 1998, Taylor adds. The majority of the funding went into early-stage or late-stage deals, although NVCA expects to see more investments in early-stage companies going forward as investors look for fresh businesses to invest recently raised funds in.

Another study, the Ernst & Young LLP/VentureOne Quarterly Venture Capital Report released on Monday, says investments in private companies totaled $5.4 billion with 524 deals in the second quarter. This report says the second quarter saw the most capital invested in late-stage companies in nearly four years.