Venture capitalists toss $6 billion at net start-ups in third quarter

By Carolyn Duffy Marsan
Network World Fusion, 11/16/99

The 'Net Rush of 1999 reached a fevered pitch over the summer, as investors continued to search for gold in them thar pipes.

PricewaterhouseCoopers/Network World yesterday released the results of their Venture Capital Survey, a survey on venture capital spending. The survey found that investments in the network industry topped $6 billion in the third quarter. This figure smashes all previous quarterly records and sets the stage for an historic year in terms of the amount of money spent on the Internet infrastructure.

List of the top ten investments of the third quarter
VC database - Search more than two years of data from the survey.

PricewaterhouseCoopers conducts a quarterly survey of all venture capital investments and breaks out data on the network industry specifically for Network World readers.

Altogether, venture capitalists pumped more than $9 billion into the U.S. economy last quarter, more than double the investment of a year earlier. The majority of the investment was related to the Internet, either in the creation of content or support for the backbone, says Kirk Walden, national director of venture capital research for PricewaterhouseCoopers.

"This goes way beyond the latest e-commerce Web site,'' Walden says. "The Internet is represented in every industry category in the survey...The Internet right now is driving our economy, and it's on an Everest slope.''

Walden predicts that by year-end the total venture capital investment in network companies could reach as high as $16 billion - triple the amount invested in 1998. To bolster that claim, Walden points out that plenty of early stage companies are receiving first rounds of funding and will require more investment in the months ahead. He also notes that he has seen no slowdown in the deal making over the last six weeks.

"The whole focus in these investments is to get to market faster,'' Walden says. "At the later stages, the money is going towards marketing, advertising and brand building.''

The survey identified 546 start-ups offering communications-related equipment, software and services that received $6.21 billion in funding in the third quarter. This amount of investment represents nearly a fourfold increase over the $1.64 billion spent in the third quarter a year earlier. In fact, the amount invested between July and September of 1999 surpassed all of 1998 investments by about $1 billion.

The size of the deals was up significantly, too. The average investment for the third quarter was $11.4 million, up from $9.43 million in the second quarter and $6.55 million in the third quarter of 1998.

Much of the investment was made in e-commerce companies, particularly Web sites offering business-to-business and business-to-consumer services. Of the top 10 deals of the quarter, half were related to e-commerce and all commanded big money - $60 million or more for each start-up.

The largest deal of the quarter was $275 million raised by WebVan, a Foster City, Calif. company creating an online grocery store and delivery service. It was the fourth round of funding for WebVan, which opened its first market in the San Francisco Bay area.

Other large deals were $195 million raised for Datek Online Holdings, an Edison, N.J. online brokerage network, and $119 million raised for eMachines, an Irvine, Calif. PC manufacturer and ISP.

The unprecedented venture capital investments follow the same path as the sky-high valuations of publicly held network companies such as Cisco, Juniper and Sycamore, according to Steve Meisel, global practice leader of PricewaterhouseCoopers' Computers and Networking Practice.

"Companies that were scraping by on $7 million or $10 million rounds of investment can go public and get market capitalizations of $1 billion,'' Meisel says. "Every quarter we say: 'Wow, these valuations are incredible. We can't see it going much higher.' And then it does.''

Meisel says the high valuations are good for enterprise customers because they mean that start-ups have more money behind them to hire high-quality staff and to solve product development problems.

"The money means companies can get new products to market and have greater flexibility in how they get there,'' Meisel explains. "They have more money to do their sales and marketing buildout and to gain alliances.''

For enterprise buyers, the survey highlights many new companies that will soon be offering Internet-related products and services:

In the area of Internet-related services, 89 companies received more than $1 billion in funding. These companies are offering Web hosting, customer relationship management and credit collection services, many of which are geared toward e-retailers.
In the software area, 181 companies received $1.7 billion in funding to develop software that automates all phases of the e-commerce process, including e-mail marketing, procurement, payment and customer services.

--In the communications area, 167 companies received more than $2 billion in funds. Much of the funding went to ISPs, digital subscriber line service providers and wireless companies.