Venture Funding Plummets
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