Venture investments plummet for seed-phase network startups

Investors gave US$27m to start-up and seed companies in the networking space in Q4 2008, about a third of the amount invested in the previous quarter.

Venture capitalists dramatically reduced investment levels in US networking startups at the end of 2008, according to new research.

Investors gave US$27 million to start-up and seed companies in the networking space in Q4 2008, about a third of the amount invested in the previous quarter and a fifth of the amount invested in the last quarter of 2007, when startup investments exceeded $136 million.

Additionally, the $27 million was the lowest quarterly total seen in 14 years of data provided to Network World by Pricewaterhouse Coopers (PwC) and the National Venture Capital Association, authors of the quarterly MoneyTree Report.

The groups track U.S. venture capital investments across all industries, and provided Network World with data specific to networking vendors, including makers of hardware, telecom products, network-related software and Internet-related technology.

Venture capitalists gave $1.8 billion to networking companies in Q4 2008, slightly less than in the third quarter, but nearly all of that went to early stage, expansion and later stage companies, as opposed to newly founded startups. This continues a trend in which VCs are avoiding new companies because they have not yet gained liquidity on previous investments.

"There's still a good appetite for these [networking] companies," says Tracy Lefteroff, a global managing partner of Pricewaterhouse Coopers (PwC). "But in the longer term, until you see some liquidity, I'm not sure you're going to see a rampup of new investment in the area."

Lefteroff says the market for startup IPOs and mergers and acquisitions will probably be weak throughout all of 2009.

The $27 million invested in networking startup and seed companies last quarter was spread across 14 deals, another low number. There were 36 deals in the previous quarter and 39 in the fourth quarter of 2007. The 14 companies that did get money were dominated by telecom offerings and software, with one hardware and one semiconductor firm mixed in.

Lefteroff downplayed the significant of the drop-off somewhat, noting that the small numbers of deals from quarter to quarter reduces the statistical significance. Across all industries, the MoneyTree Report identified 3,808 deals totaling $28.3 billion in 2008. That represents an 8% decrease in dollars from 2007, and a 4% decrease in deal volume.

Looking at companies across all stages of development, software and Internet-related vendors were among the top performers in terms of securing investments in 2008.

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