Another quarter, another 50 percent year-over-year drop in telecom startup investments

January 28, 2003

3 Min Read
VC Funding Dips Again

Can 2003 bring an uptick in the VC business?

The year 2002 certainly wasn't kind to the venture capital industry. Many venture investments looked like houses on fire with no viable exits. But though the numbers are brutal, there are still some optimists out there, and they say the quality of startups is improving all the time.

Venture capital investments in telecom companies during the final three months of 2002 dropped by about half from the last quarter of 2001, according to new data released by PricewaterhouseCoopers (PwC), Venture Economics, and the National Venture Capital Association. Venture capitalists invested about $562 million in telecom startups during the fourth quarter, compared to about $1.1 billion invested during the year-ago period.

For all of 2002, telecom-related startups raised about $2.9 billion in venture funding, compared to the $6.4 billion raised in 2001.

There were only about 60 first-time financings in the telecom space. That's the lowest total in eight years, according to Tracy Lefteroff, global managing partner of PwC's venture capital and private equity practice. This indicates that most of the money tied up in the space is going to sustain existing startups.

"The overall message is that if you are an entrepreneur, the bar has been raised on the types of ideas that will get funded," Lefteroff says.

"The quality of deal flow of new companies is way up, but the quantity is still very conservative," says Foundation Capital partner Bill Elmore, whose firm is still investing a $595 million fund. "For investors, the hurdle to make new investments is way up. We're taking months to make an investment decision and after we take that extra time, we're making a smaller initial investment."

"I don't think anyone should mistake patience for pessimism," says Elmore.

Company restarts also rose dramatically in 2002, making up about three percent of all financing rounds completed, according to VentureOne and Ernst & Young, which released their own venture capital numbers on Monday. There were 61 restart rounds reported in 2002, compared to just 30 restarts reported in the prior year.

(A restart round – also called a washout round – occurs when a startup's valuation is significantly reduced and its current investors' stake is diluted. Current investors that don't re-up get washed out.)

Corporate investors are in full-fledged retreat from the venture investing world. This week, in fact, Corning Inc. (NYSE: GLW) confirmed it is considering selling its Corning Innovation Ventures, a two-year fund that has invested more than $50 million in optical networking startups.

"I think we are seeing a bit of attrition" among VCs, says Jesse Reyes, a VP at Venture Economics. "It is rare that a VC firm simply closes its door and walks away, but we've seen the number of high net worth investors and corporate venturing groups dwindle down dramatically."

— Phil Harvey, Senior Editor, Light Reading

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