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Optical/IP

Venture Funding Plummets

Privately held optical networking companies still see evidence that funding for their sector is drying up, according to the MoneyTree Survey released Monday by PricewaterhouseCoopers in partnership with VentureOne. Not only are investing levels dropping, but the sources of startup capital are decreasing in number, as big vendors such as Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT) have slowed their funding activities.

The MoneyTree Survey, which reported on venture capital activity in the second quarter of 2002, showed that funding activity has dropped for the fifth straight quarter. Combine that with the fact that returns from venture capital funds have hit their lowest mark in twenty years, and it makes for a grim reality in the optical networking world (see VCs Turn to Triage).

Venture capital funding in the communications and networking sector, including optical networking vendors, dropped to $1.8 billion in the second quarter of 2001 from $3 billion in the first quarter.

The second-quarter funding figure is a whopping 70 percent lower than the $6.1 billion the communications sector saw in the year-ago period. Indeed, funding for communications companies in the second quarter is slightly less than the $2.2 billion in funding that was handed out in the same period two years ago.

Optical networking venture capital funding has plummeted, but folks are still shy about saying when the sector has hit bottom. "It's very difficult to generalize about hitting rock bottom in investment terms -- especially about the photonics industry -- but there are specific companies whose value proposition is real and compelling," says Glen Schwaber, a general partner at Jerusalem Venture Partners. Schwaber maintains that so long as carriers need more efficient networks, there will be opportunities for innovative systems, subsystems, and components companies.

Of course, what has become a difficult time for components and systems companies has become excruciating for new service providers (see Report Details Component Slide). Cogent Communications Inc. CFO Helen Lee says her company began raising its Series C funding round in February, and they are just now in the process of closing. "We contacted more than 100 venture capitalists, and two funds that were interested had gone out of business since we first spoke to them," she says. The company is expected to announce a large round of debt and equity financing.

Cogent's scramble for VC money speaks to another noteworthy item in the latest MoneyTree Survey: Sources of funding other than traditional venture capital -- investments from corporations and vendor financing -- are all but gone.

During the first quarter of 2000, when the telecom sector was at its frothiest, VCs made up 76 percent of the equity invested in privately backed companies. In the second quarter of 2001, VCs made up 90 percent of the equity invested.

"Investing in the early-stage optical communications space requires tech skills, patience, and a high tolerance for risk," says Schwaber. "It's not surprising that while their own stock prices are abysmal, many public corporations are losing their nerve for that type of investment. So what's left are VCs with the smarts and the guts to help the best entrepreneurs in this sector win in the long term."

- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
light at the end of the tunnel 12/4/2012 | 7:57:22 PM
re: Venture Funding Plummets Given the current market, and the comment that Cogent has been at it since February, if a company has a good business plan and a solid business/technical team, does it take over 7 months to close VC financing, or is it a sign that they don't have such a solid plan and/or team?

Watching many other photonic startups fight for money, I wonder if most of them are weak on the planning front and now that money is drying up, their weaknesses are being brought to the surface by more cautious VC houses?

phemt 12/4/2012 | 7:57:21 PM
re: Venture Funding Plummets When we started our company last September, the equity markets were starting to rumble, but we had no idea a major earthquake would occur. We focused on the business plan and operational rollout in counjuntion with product design and felt we were ready to talk to the investment community in the February timeframe. The quake was well underway then and the VC's could not recognize a good plan from the bad ones they had already been burned by.

Having been self funded for almost a year, we quit wating for the VCs a few months back and are applying our packaging technology towards adjacent markets on a contractural basis. If we had received our funding in the March timeframe as intitally anticipated, we would have a facility up and running and would not be shipping much, if any prouct. Everything happens for a reason.
othr132 12/4/2012 | 7:57:21 PM
re: Venture Funding Plummets 7 months would have been a dream scenario for us.Our star-up co. had 2 deals in hand last summer but the founders had stars in theur eyes and instructed us to keep shopping for a higher valuation.Our B-plan was full of holes,our founders had no industry experience,and our technology had not even reached proof of concept,but VC's were still willing to fund us.Not anymore,1 year later and we have 1 deal on the table(unsigned) at 20% of our high valuation mark.Greed is not always good.Rule of thumb today VC's want to back grade A men even if they have Grade B ideas.
skeptic 12/4/2012 | 7:57:18 PM
re: Venture Funding Plummets Given the current market, and the comment that Cogent has been at it since February, if a company has a good business plan and a solid business/technical team, does it take over 7 months to close VC financing, or is it a sign that they don't have such a solid plan and/or team?
--------------------

It can be any number of different things. Its
never just a matter of raising the money. Its
a matter of what terms the money is raised on
and whats involved in the deal.

On the positive side, it can be that the
investors want to put more money in than the
company wants (as an example). On the negative
side, it could be that either multiple people
want to be the investment lead or that nobody
wants to be the investment lead.




nobollox 12/4/2012 | 7:57:16 PM
re: Venture Funding Plummets "The quake was well underway then and the VC's could not recognize a good plan from the bad ones they had already been burned by."

_________________________________________________

Coming from a Corporate Venture only standpoint, we are still looking for good investments. We have a strict set of criteria, that because of the companies that have "burned" us in the past, has become less forgiving. Convincing partners to go along with an investment missing or weak on two or three or more criterion, was much easier during the "bubble."

If the investment is taking 7 months, there can be many reasons for it. Try evaluating your business plan from an objective point of view. It is difficult, but try and remove your emotional investment in the company and see, if any, what areas in your company may have holes in it.

Management (relevant experience only), Technology, Target Market Conditions, Intellectual Property, Customer Base (traction and customer validation are most important), Finances (burn rates, CapEx, etc.), etc. Everything must be reasonable.

If everything checks out, then it may be that they just want to invest more or it could be simply an internal struggle for them. There are many possibilities. Further, the more rosy and perfect a company looks, the more they will scrutinize and question it. Especially in this economy.


Good luck.
phemt 12/4/2012 | 7:57:09 PM
re: Venture Funding Plummets Thanks for the words of advice.
drone387 12/4/2012 | 7:57:03 PM
re: Venture Funding Plummets "or is it a sign that they don't have such a solid plan and/or team?"

It's a sign that stocks like JNPR went from $240+ to $24- or a 90%+ crash. Companies during the bubble had C round valuations of $800M+. Now, VCs are valueing companies the same companies at $100M-. It takes a lot of searching to find a group of VCs willing to value your company for more than $100M. CopperCom & BrightLink had to hit the finance reset button with large reverse splits followed by a pile of new stock to the latest investors. Amber & River Delta scored with $400M/$300M buy outs.
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