Q3 funding tops $6 billion

VC firms heaped money on business-to-business e-comm, 'Net infrastructure firms.

By Carolyn Duffy Marsan
Network World, 11/22/99

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

A PricewaterhouseCoopers/Network World study of venture capital spending released last week found that investments in the network industry topped $6 billion in the third quarter, smashing all previous quarterly records and setting the stage for a historic year in terms of the amount of money spent on Internet infrastructure.

List of the top ten investments of the third quarter
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The majority of the investment was related to the Internet, with firms involved in e-commerce and backbone equipment leading the way, says Kirk Walden, a national director 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.

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

The study identified 546 start-ups offering communications-related equipment, software and services that received a total of $6.21 billion in funding in the third quarter of 1999.The amount represents a nearly fourfold increase over the $1.64 billion spent in the third quarter a year earlier.

"There is a race going on to build the next-generation equipment to support the Internet," says Tom Dyal, managing director of Redpoint Ventures of Menlo Park, Calif. "The winners are the ones that not only put the best team on the field, but also raise a large amount of money."

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 in fourth-round funding raised by WebVan, a company in Foster City, Calif., that is building an online grocery store and delivery service.

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

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 PricewaterhouseCooper's 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."

Good for enterprise nets

Meisel says the high valuations are good for enterprise customers because start-ups have more money 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 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, nearly 90 companies received a total of 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.

One hundred and eighty-one companies received a total of $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.

In addition to business-to-business e-commerce, the hottest areas for venture capital investments are next-generation broadband switches and routers, and broadband semiconductors, Dyal says. He identifies enterprise network equipment and network management software as two areas that are "cold."

"The trend in the enterprise that we see is that applications are being reconstructed to take advantage of the Internet," Dyal says, adding that he expects to see more investments in application service providers that rent out applications as well as start-ups that take more "novel approaches."

The large amount of money going to network start-ups and the fact that venture capital deals are getting bigger is good news for corporate IT buyers, who are increasingly turning to start-ups for technology that is vital to their e-commerce initiatives.

"You need to know that a company is well-funded and has a first-class management team before you start working with them," says Paul Mullaney, digital initiatives manager at 3M. 3M has tapped start-up Exterprise in Austin, Texas for an innovative Web-hosting application. Exterprise is backed by Austin Ventures and Triton Ventures.

"We're not working with IT start-ups as a rule, but the uniqueness of the Exterprise software drove the relationship," Mullaney adds. "We knew the company had completed its first round of financing, so we felt pretty secure in that regard. . . . We were pretty sure that it wasn't going to be a flash in the pan and that three months afterwards they'd run out of money."