The venture capital community remains bullish on the Internet economy, pumping a record $US15 billion into business services, network software and telecommunications start-ups in the second quarter of this year, according to the latest PricewaterhouseCoopers LLP/Network World Venture Capital Survey.
Despite a downturn in the valuation of Internet stocks that began in March, the second quarter saw a 20 percent rise in network-oriented investments over the $US12.5 billion spent in the first quarter of this year. Altogether, venture capitalists have invested $US27.55 billion in network companies this year - $US4 billion more than was spent during all of 1999.
Although overall investments were up significantly, the funding shifted dramatically away from e-commerce companies toward ventures offering Internet access and applications. Among the hottest areas of investment were application service providers, broadband service providers and outsourcing firms offering enterprise-class Web hosting and management services.
"The network area is still one of the bright spots," says Tracy Lefteroff, managing partner of PricewaterhouseCoopers' Venture Capital Practice. "This is going to continue to be a growth industry as everyone retools and re-equips their portion of the Internet backbone to accommodate new technologies coming out like fiber optics, wireless and broadband."The second quarter of 2000 was a record breaker on all measures. Altogether, 960 network companies received an average of $US15.6 million each during the second quarter. Both figures were up significantly over the first quarter, when 886 network companies received an average of $US14.14 million each.
The second quarter of 2000 saw more than triple the amount of venture capital funding than the second quarter of 1999, when network-oriented investments first began to skyrocket. During spring 1999, venture capital firms invested $US4.77 billion in 506 network companies, with an average investment of $US9.4 million.
The biggest increase for the quarter was in Internet applications and tools providers, which captured $US2.85 billion, up 35 percent over the previous quarter. Business service providers such as Web hosting firms snared $US2.99 billion, up 24 percent over the past quarter. And access and infrastructure companies, including ISPs, captured $US1.87 billion, an increase of 11 percent.
"For corporate network managers, the trend is toward outsourcing," Lefteroff says. "As they bring Internet tools into their own businesses, hosting and other services along those lines may be a better way to go than making all the investments internally."Meanwhile, investments in business-to-business and business-to-consumer Web sites plummeted to $US1.58 billion and $US1.36 billion, respectively.
"It's all about the business of the Internet, the business of networking," says Kirk Walden, national director of PricewaterhouseCoopers' Money Tree Survey, which tracks venture capital investments in all segments of the U.S. economy, including networking. "The companies that are getting funded are not companies that a consumer might see. In sharp contrast to a Pets.com, consumers will never know who these companies are."The biggest deal of the quarter was a whopping $US402 million invested in Carolina Broadband, a Charlotte, N.C., provider of broadband multimedia services including cable TV, Internet access, and local and long-distance telephone services to residents and businesses.
The next two largest deals were $US175 million invested in Formus Communications, a Denver provider of broadband ISP and competitive local exchange carrier services, and $US172 million invested in CoreExpress, a St. Louis extranet service for business-to-business e-commerce companies.
Industry observers see no end in sight to the amount of deal-making in the network area. Indeed, PricewaterhouseCoopers predicts that the network segment of the economy will end up raking in more than $55 billion in venture capital funding by the end of 2000 - more than double the amount spent in 1999.
"We're going to see larger and larger deals," Walden predicts. "Venture capital firms have an incredible amount of money under management to invest, and it takes more money for them to do network deals, particularly telecommunications deals."