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Telecom VC Slump Continues

Light Reading
News Analysis
Light Reading
7/30/2002

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
http://www.lightreading.com

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diag_eng
diag_eng
12/4/2012 | 10:01:53 PM
re: Telecom VC Slump Continues
Tell me something I don't know.

Man, if LR isn't trolling the board seeking our input for articles, then they are expounding the obvious.

I guess telecom isn't the only thing that is floundering ...


sigint
sigint
12/4/2012 | 10:01:50 PM
re: Telecom VC Slump Continues
I'm surprised that it isn't any worse. Do individuals that invest money in these VC funds have access to relevant information about these VCs past "accomplishments"?
freethinker
freethinker
12/4/2012 | 10:01:50 PM
re: Telecom VC Slump Continues
A couple of thoughts about the VC implosion:

1) While the toll has been enormous, can't we at least breathe a sigh of relief that all these venture capitalists and investment bankers were diverted from law school?

2) And when did "venture" get removed from the capital raising process? It seems that the VCs are as guilty, or even guiltier of the herd instinct than public investors. With everybody first rushing into telecom/networking and then backpedaling as fast as crazy, it looks like the Colombian coffee ad showing the ship listing from side to side.

3) On a very serious note, give the $4-5 trillion vaporized in this sector over the past three years a major haircut - to $2 trillion. That still would equate to a $40,000 endowment for every American K-12 student. Of course, we'd have to hope that the endowment wasn't "invested" in private equity pools and/or aggressive growth mutual funds.

If the role of capital is to flow to areas of high potential returns arising from new and innovative solutions to vexing social and economic problems, we have to come to grips with the reality that the quick fixes and easy solutions in telecom and networking have been accomplished. The Last Mile (or just the 100 feet to my house) is the Omaha Beach of communications - it must and will be conquered, but it will not be easy or fast...and it will inflict a very high cost. There are too many entrenched players with a lot of ammunition to defend their positions for this to happen as quickly as it should.

In the meantime, investors and consumers will be stuck offshore in roiling waters. No joy for anyone. And the saddest part is that if someone does come up with an elegant solution for this situation, it is likely to be rejected by the VCs because it doesn't fit within their model.

Arrrgggghhh.

FreeThinker
jamesbond
jamesbond
12/4/2012 | 10:01:49 PM
re: Telecom VC Slump Continues
Do individuals that invest money in these VC funds have access to relevant information about these VCs past "accomplishments"?
---------------------------------

CEO/CFO of startups lie to VCs painting a rosy
picture. VCs lie to their LPs. LPs probably
are ex CEO/CFOs who made a killing. So you
see its a cycle and the game goes on.
BobbyMax
BobbyMax
12/4/2012 | 10:01:45 PM
re: Telecom VC Slump Continues
VCs make money when they give money to enterpreauners. Some of these enterpreauners can hardly write and understand a business plan as they are inexperienced. It is very difficult to predict the market the proposed product demands. The era of high tech is over as no money can be made from high tech companies.

There were about 800 optical compnies established between 1999 and 2002. Most of these have exactly idenitical product lines
tiadakola
tiadakola
12/4/2012 | 10:01:25 PM
re: Telecom VC Slump Continues
Hey BobbyMax/Harvey Mudd,

Dude, find the spell checker...jesus are you an idiot...how's that half empty glass of water always within a hands reach?
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