Telecom VC Slump Continues

First-round financings are stabilizing, but investment levels overall are at a four-year low

July 30, 2002

2 Min Read
Telecom VC Slump Continues

The venture capital industry continued to slow in the second quarter of 2002 with telecom investments reaching the lowest levels since the fourth quarter of 1998. Total investments in the telecom and networking sectors dropped by more than half from last year.

Second-quarter telecom investments were $657 million, compared to $784 million in the first quarter and $1.7 billion during the second quarter of last year, according to the latest MoneyTree Survey released Tuesday by PricewaterhouseCoopers, Venture Economics, and the National Venture Capital Association.

Networking and equipment investments dropped as well. The category attracted $633 million in the second quarter, compared to $859 million during the first quarter and $1.4 billion a year ago, the survey stated.

[The MoneyTree Survey defines "telecommunications" startups as those companies focused on the transmission of voice and data, including: long-distance providers; local exchange carriers; satellite and microwave communications companies; and wireless communications services and components companies.]

Across all industries, VCs invested $5.7 billion in 819 deals during the second quarter of 2002. That's down from $6.4 billion in 826 deals completed the previous quarter and $12 billion in 1,376 deals the year before.

California, Massachusetts, and Texas are the three states that have attracted the most overall venture capital dollars during the first six months of this year, according to data released by Ernst & Young and VentureOne last week. In the nine-county San Francisco Bay area, communications companies raised $955 million during the first and second quarters, leading all other venture investment sectors in that region.

One big reason the numbers have continued to fall is that VCs funded far too many companies during the boom years and are now focusing their attention on keeping those companies alive, rather than starting new ones. Ted Dintersmith, a general partner at Charles River Ventures, says what we're seeing is a case of "the irresistible force meeting the immovable object."

"I'm not seeing venture capitalists having a very relaxing summer," he says.

Among the tumbling numbers there is some silver lining, VCs say. For one thing, seed-round financings, as a percentage of overall investments, have remained stable for about six months now.

In the second quarter, first-time financings accounted for about one fourth of the total number of deals done and 21 percent of total number of dollars invested, according to the MoneyTree Survey. Those numbers are on a par with the first-quarter results. This quarter-to-quarter stability is important, since many see first-round financings as an indicator that VCs may be becoming less preoccupied with their struggling portfolio companies.

Also, startup valuations have dropped, making new investments less expensive for VCs; and talented workers are in plentiful supply, thanks to large corporate layoffs.

"Historically, our business is very cyclical," says Dintersmith. "It's always darkest just before the dawn."

— Phil Harvey, Senior Editor, Light Reading

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