Venture spending reflects the need for speed, electronic commerce tools

By CHRIS NERNEY
Network World, 02/22/99

Fueled by electronic commerce and the feverish drive for high-speed Internet access, venture capital investing in network-related companies totaled a record $5.25 billion in 1998, nearly 45% more than the previous high registered in 1997.

Company Product or service Amt.

Advanced Telcom Group Inc.. Los Altos, Calif. Build and manage CLECs $102M

US Internetworking, Annapolis, Md. Lets companies use software apps over the Internet $62.2M

Healtheon, Palo Alto, Calif Internet service for health care industry $46.1M

NextCard, San Francisco Market credit cards over the Internet. $38M

IVillage, New York Online communities $33.5M

InsWeb, Redwood City, Calif. Insurance quotes over the Internet $30M

The past year also saw the number of network venture funding deals hit an all-time mark of 880, about 25% more than the 705 deals made in 1997, according to the latest PricewaterhouseCoopers/ Network World Quarterly Venture Capital Survey.

PricewaterhouseCoopers provides Network World with an exclusive analysis of network industry data taken from a broader venture capital survey.

Meanwhile, network investments in the fourth quarter of 1998 reached $1.55 billion, down slightly from the third-quarter total of $1.64 billion, but still the second-largest amount ever. However, the 257 network venture deals in the fourth quarter edged out the 251 deals in the third quarter, the previous record.

E-commerce, in a variety of forms, was a huge investment category for venture capitalists in 1998 as the corporate world explored ways to make the Internet pay off through increased revenue and lower costs. (For more on e-commerce, turn to our Electronic Commerce pages).

E-commerce is forcing fundamental changes in how companies do business, and not just by providing another outlet for customers to buy products and services, says Steve Meisel, global leader of PricewaterhouseCoopers' networking communications practice.

"We're talking about the erosion of traditional intermediate sales channels between producer and consumer," he says. "E-commerce is driving that erosion."

Among the e-commerce companies drawing venture funds in the fourth quarter were:

PaylinX of St. Louis ($4 million in first-round funding), which makes payment-processing software for e-commerce applications.
Commission Junction of Minneapolis ($300,000 in seed funding), which facilitates pay-per-sale advertising on the 'Net.
Commerce, Inc. of Lexington, Ky., ($4.1 million in second-round funding), which offers Internet business directories.
Eclipse Trading of New York ($2.4 million in first-round funding), which offers after-hours online securities trading.

Equally significant in 1998 and specifically in the fourth quarter has been venture investing in communications equipment and service start-ups, particularly those trying to find ways to speed Internet access.

"The bandwidth issue is the big challenge," Meisel says. "Do we make the pipe faster, or bigger? Do we go wireless? We see venture funds being attracted to each of the products addressing that issue."

As has been the case in the past year, wireless start-ups received plenty of attention in the fourth quarter as venture capitalists funded two dozen deals.

One of the biggest winners in the venture sweepstakes of 1998, wireless Local Multipoint Distribution Services company Formus Communications of Denver, grabbed $11.5 million in the fourth quarter. The company has received a total of $82.2 million in three funding rounds since the fourth quarter of 1997.

Other start-ups trying to solve the bandwidth crunch are:

High Speed Access of Louisville, Ky., ($438,000 in first-round funding), which is developing Internet connectivity over cables.
Quarry Technologies of Burlington, Mass., ($6 million in first-round funding), which sells high-speed routing and quality-of-service technology for internetworking.
Copper Mountain Networks of Palo Alto ($25.3 million in fourth-round funding), which markets end-to-end digital subscriber line products designed to enable service providers to offer high-speed connectivity over existing copper wires.