VCs still nuts about nets

By CHRIS NERNEY
Network World, 05/24/99

Another quarter, another network funding milestone.

Since superlatives are no longer adequate to describe the torrent of venture capital flooding into network start-ups, here are the dry facts:

Nearly 300 network companies received $2.38 billion in venture funding in the first quarter, according to the ninth quarterly PricewaterhouseCoopers/Network World Venture Capital Survey. PricewaterhouseCoopers conducts a broad venture capital survey every quarter and breaks out network industry numbers exclusively for Network World.

That dollar amount of network funding during Q1 was 45% above the previous record of $1.64 billion set in the third quarter of 1998.

It's also more than double the $917 million in network industry investments in Q1 '98, and roughly quadruple the $588 million recorded in Q1 '97, the first quarter tracked in the joint survey.

And here's a scary thought: In the past two years, the first quarter has trailed all others in total network industry venture dollars. If that holds true this year, then 1998's all-time high of $5.25 billion could be eclipsed by mid-year.

Networking means 'Net

More than ever before, the Internet is the driving force behind network industry investments. Of the 294 network companies drawing venture funding in the first quarter, 72% were Internet start-ups, compared to 61% in Q1 '97, when the first survey was conducted. And unlike two years ago, when many venture capitalists were shying away from Internet "pure plays," the vast majority of Internet companies receiving funding in the recent quarter are nothing but 'Net.

For IT professionals, these figures indicate that the assimilation of Internet technology by the network universe is rapidly becoming complete.

"What you're seeing is a product of the convergence and interdependence of traditional networking technology and the Internet," says Kirk Walden, national director of venture capital research for PricewaterhouseCoopers.

The proliferation of com-panies providing Internet-based services means growing challenges in terms of managing network resources, and growing employment opportunities as the number and size of networks continue to increase.

Electronic commerce companies in particular were popular among investors, with 72 grabbing funds.

"Clearly everyone is trying to back the next eBay," says Tim Barrows, a general partner at Matrix Partners in Waltham, Mass. "We're all trying to stake out territory in the e-commerce space."

E-commerce start-ups receiving funding ranged from vendors of transactional processing services, such as Internet Commerce Services of Nashua, N.H. ($7 million), to dozens of online retailers.

And the deals keep getting larger as well (see graphic). Among the top money magnets in Q1 were:

Wit Capital Group, which raised $72 million in a second round of funding. Wit, an online investment broker, is using the money to prepare for a pending initial public offering of stock.

InterNAP Network Services, which landed $32 million in Q1. The company says it has developed a series of private network access points that connect to all major Internet backbones and avoid sending data through the "chokepoints" of the public 'Net. InterNAP targets high-volume online retailers, enterprises and ISPs.

Accelerated Networks, which received $30 million in a "follow-on" round of funding. The company makes access devices for the customer premises that integrate multiple traffic types over a single line.

Barrows says there are two reasons that venture deals in excess of $20 million or so are becoming more common.

"For one thing, there's a tremendous amount of venture capital available," he says. "The other reason the deals are growing is the importance to companies of getting to and owning a market first."

Niche players abound - evidence that the Internet economy continues to fill out. E-Steel, for example, runs a Web site that brings together buyers and sellers in the global steel industry. The New York-based company raised $3.5 million in first-round funding.

Another niche vendor, iPrint of Redwood City, Calif. ($7.5 million), designs e-commerce software to automate mass-market custom printing over the Web.

Net gear and net management

While in a minority, there were a number of venture deals involving network equipment vendors and providers of network management services and software. Among them were:

Avici Systems of North Billerica, Mass. ($4.3 million), which sells high-performance backbone routers and switches.
Efficient Networks of Dallas ($2.1 million), which designs ATM and asymmetric digital subscriber line adapter cards.
Tavve Software of Durham, N.C. ($1 million), which makes network management reporting software.

A handful of companies offering telephony products and services received funding in Q1. These include PakNetX of Salem, N.H. ($5.1 million), a seller of Internet-based multimedia call centers, and carrier Internet Telephony Exchange of Princeton, N.J., which got a second-round deal totaling $15 million.

Nerney is a senior analyst at Internet.com, a Web site for Internet professionals.