Internet start-ups still rolling in venture dough

By Carolyn Duffy Marsan
Network World, 08/23/99

When you're hot, you're hot.

Venture capital investments in Internet start-ups reached an all-time high in the second quarter of 1999, with funding nearly tripling the amount in the same quarter last year, according to the 10th-quarterly PricewaterhouseCoopers study of venture capital spending.

More than 300 start-ups, most offering Internet-related communications services, software and hardware, received just over $3 billion in funding, with the average investment around $10 million. This sector represented about 40% of the total venture capital investment in the U.S. during the second quarter. Altogether, venture capitalists pumped $7.67 billion into about 1,000 U.S. companies, up from $4.31 billion in the first quarter of 1999.

PricewaterhouseCoopers conducts a venture capital survey every quarter and gives Network World the exclusive on network results.

For enterprise customers, the record-setting investments in 'Net technology could mean that many new and innovative products and services will be getting to market in the next 12 to 18 months. Big money also means that start-ups will have the financial backing necessary to manufacture and support their products.

"Small companies like WebLine are offering the leading-edge Web technologies that large companies need and aren't getting from established vendors," says Bob Weinberger, vice president of marketing at WebLine Communications, a provider of Internet customer service software in Burlington, Mass., that raised $10 million last quarter (NW, Aug. 16, page 10). "It's vital to us to have access to capital because it assures customers that we're rock solid in terms of our future financing."

Most network investments made last quarter were tied to the 'Net either directly, as in funding for ISPs or companies developing electronic commerce software, or indirectly, as in vendors building high-powered gear needed to accommodate Internet traffic. "At least $2 billion of the $3.184 billion invested in networking is directly or indirectly influenced by the Internet," says Kirk Walden, national director of venture capital research for PricewaterhouseCoopers.

Network vendors expect the investment community's interest in Internet-related deals to remain strong.

"The venture capital community is realizing just how big the Internet opportunity is," says Dave Zwicker, vice president of marketing at Indus River Networks, an Acton, Mass.-based virtual private network supplier that raised $14 million last quarter. "All the networking companies that have some role in providing either access to the Internet or in products for building business-grade communications environments over the Internet are benefiting from that."

Driven by the popularity of the Internet, network investment increased the most of any category in the study, which tracks quarterly venture capital funding in all industries.

Over the past several quarters, venture capital investments in Internet-related companies have continued to set new records. For the first half of this year, network-related investments reached $5.56 billion, compared to a total investment of $5.3 billion during all of 1998. The average investment per network company is also up, from about $8 million last quarter to over $10 million this quarter.

"It used to be that $10 million was a lot, but now we're not seeing many deals under that," says Steve Meisel, a partner with PricewaterhouseCooper's Networking Communications group.

The biggest deal of the quarter was a $128 million investment in VIA Net Works, a Reston, Va., ISP that serves Latin America and Europe.

One technology that continues to benefit from venture capital investment is wireless communications. A total of 17 wireless companies received $226 million in funds to develop wireless services ranging from broadband to video-over-wireless to wireless Internet appliances. The largest wireless investments were: $91 million in Metawave Communications, a Redmond, Wash., provider of spectrum management systems for wireless service providers; $24 million in Wavtrace of Bellevue, Wash., which develops point-to-multipoint wireless broadband access systems; and $20.4 million to Time Domain Corp. of Huntsville, Ala., for investment in its ultrawideband wireless technology.

David Hathoway, managing general partner with Venrock Associates, says wireless ventures are getting so much money because they need to cover the costs of building an infrastructure capable of handling a growing number of voice subscribers as well as new data services. Venrock is an investor in Metawave.

"We're already seeing carriers and companies looking at wireless as an alternative to wireline," Hathoway says, adding that Venrock is investing in wireless component, equipment and service providers. "We expect the investments in wireless to be ongoing for the next couple of years."

Another hot area for investment was digital subscriber line (DSL) technology. Among the DSL firms that raised money last quarter were: DSL.net, a New Haven, Conn., provider of DSL services to smaller cities that received $40 million; Jato Communications, a data communications DSL provider from Denver, that received $20 million; and New Edge Networks, a Vancouver, Wash., DSL carrier that received $15.3 million. Overall, 11 DSL companies received a total of $189 million.

William Seifert, a general partner with Prism Venture Partners, says the investment community is funding all emerging broadband access technologies, including DSL and cable modems.

"It's not clear which technology is going to win," he says. "DSL is just one bet to place."

Prism is an investor in DSL.net, which plans to go public soon.

Six firms with products that integrate voice and data over the Internet also were targeted for investment, receiving a total of $63.3 million. The largest investments in this area were $15.5 million received by Integral Access, a maker of packet-based telecommunications access systems based in Chelmsford, Mass., and $14.3 million received by MSHOW.com, a provider of telephone services over the 'Net in Littleton, Colo.

Another area for investment was business-to-business electronic commerce sites and services. For example, Centerbeam, a Santa Clara, Calif., provider of Internet services for small businesses, received $20 million in its first round of funding.

Other start-ups in this area that received seed funding were Branders of San Mateo, Calif., which received $2 million, and Conduit of Mountain View, Calif., which received $1.3 million.