Venture-backed startups in the U.S., particularly in networking and telecom, may be growing in appeal to would-be acquirers.

A report issued jointly by the National Venture Capital Association (NVCA) and Thomson Venture Economics cites a "modest increase" last quarter in the level of merger and acquisition activity among VC-funded U.S. startups, with big deals occurring in networking and telecom.

These findings appear to confirm conclusions reached in a recent Light Reading Insider, "Startup Shakeout," which concluded that startup valuations had bottomed and the venture market was on the cusp of a rebound (see Startups Look for the Bottom; you may buy the report here).

The total number of M&A deals among venture-backed companies stateside rose about 28 percent, and the total value of such deals among venture-backed companies rose 27 percent between the first and second quarters of 2003, according to the NVCA/Thomson report.

While the total value of deals for the first half of 2003 ($3.3 billion) is still lower than the level for the first half of 2002 ($3.6 billion), the average size of deals with disclosed values appears to be up: The average value per disclosed deal last year was $51.98 million; for the first half of 2003, it was $68.71 million.

Deal valuations need to stay high for a trend to emerge, says NVCA president Mark G. Heesen. Even if increases in deal numbers go up, he maintains, it's the average price paid for each transaction that will show the market has really gained in value.

In a prepared statement, the firms say the small uptick in M&A for startups was the first after two declining quarters, and they attribute it to "a resurgence in activity in the Telecommunications sector, and healthy increases in the Biotechnology and Networking/Equipment sectors."

Overall, the percentage of startup M&A deals in telecom and networking is holding fairly steady: These kinds of deals were about 15 percent of all startup M&A for the first half of this year; last year, they represented about 16 percent.

According to Thomson Venture Economics spokesman Joshua Radler, Networking/Equipment refers to data communications startups, whereas Telecommunications refers to service providers and wireless startups. Examples of networking deals cited in the report are the buy of WaveSmith by Ciena Corp. (Nasdaq: CIEN) for about $178 million (see Ciena Completes WaveSmith Buy) and the purchase of Vivace by Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) for $135 million (see Tellabs Closes Vivace Acquisition), both in June 2003. Telecom deals cited by the firms include the purchase of Winphoria by Motorola Inc. (NYSE: MOT) in April 2003 for about $180 million (see Motorola Acquires Winphoria).

— Mary Jander, Senior Editor, Light Reading