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Funding for startups

VC Funding: Drip, Drip, Drip

Venture capital investments in telecommunications startups fell by more than 50 percent since the third quarter of last year, according to the latest MoneyTree Survey by PricewaterhouseCoopers, Venture Economics, and National Venture Capital Association. Thanks to the prolonged economic slump, venture investing across all industries declined 48 percent since the third quarter of 2001, the survey states.

The effects of the economic slowdown are as pronounced as ever in the private equity area. The time between financing rounds is getting longer. The average size of each investing round is decreasing. And the percentage of money in each sector going to new companies is also getting smaller -- which suggests that many venture capitalists are sitting on the sidelines and nursing their portfolios.

In the third quarter, 67 telecommunications companies received $555 million in funding, according to the MoneyTree survey. Across all industries, 647 companies received $4.8 billion, the lowest total amount of funding in four and a half years, the survey states (see VCs Wait for Liquidity).

While the number of dollars put into startups continues to slide, the deal flow, or number of deals being completed, has only dropped by about one third, according to VentureOne and Ernst & Young, which published their own venture capital study with similar results late last week.

“When you see the time between financing rounds increase from a median of 9.5 months in 2000 to 17 months in 2002, you know executives are finding ways to stretch their budgets," says Bryan Pearce, who leads Ernst & Young's venture capital advisory group, in a written statement.

Telecommunications was the second largest industry category represented in the survey -- behind software, which accounted for about 22 percent of all venture capital invested last quarter. Despite its relative size, however, only about 13 percent of the venture capital dollars invested in telecom companies went to first-time investments -- 87 percent went to existing portfolio companies.

Table 1: Venture Funding Slips Year-to-Year
Industry Sector 3Q2002 ($M) Investments 3Q2001 ($M) Investments Percentage of Decrease
Networking and Equipment 341.00 1,353.00 75%
Telecom 554.00 1,122.00 51%
Semiconductors 270.00 516.00 48%
Source: The PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey


It's apparent that many VCs are keeping their existing investments afloat, a situation that makes life tougher for brand new startups. "New telecommunications companies have the hardest time getting first-time financing," says Tracy Lefteroff, who leads the venture capital practice at PricewaterhouseCoopers.

On a conference call announcing the MoneyTree survey, venture analysts and VCs exhausted every "back-to-basics" and "return-to-reality" cliché imaginable (see VCs Say the Worst Is Over). If there is an upside to the venture capital downturn, perhaps the quality of investors and startups will improve as the venture market shakeout continues.

"VCs today assume they'll be working with their investments for five years or more," says Bob Grady, a general partner at Carlyle Venture Partners. "This is good news. The rate of investment is going down, so less money is chasing a relatively constant pace of innovation."

— Phil Harvey, Senior Editor, Light Reading
www.lightreading.com
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whyiswhy 12/4/2012 | 9:26:11 PM
re: VC Funding: Drip, Drip, Drip Smoke:

I would say the numbers I have seen point to some pick-up mid next year, followed by another pick-up mid 2004, and some greenfields in 2005. The first wave is cable, the second is wireless, the third is wireline (LH). None of them will be killers, you will have to catch each to make it to the beach.

So if the box or widget can sell to all sectors, you're gonna get traction and reduce the need for capital. Broad product lines with minimal cost. Strong plus in my book. Timing is now, under those caveats.

JMHO

-Whyiswhy
smoking_craters 12/4/2012 | 9:26:14 PM
re: VC Funding: Drip, Drip, Drip whyiswhy:

I don't agree. Now is most definitely NOT the best time for VC's to be investing in telecom box startups. They'd most probably just be flushing their money down the old shitter.

I'll tell you why. Carriers aren't ordering ANYTHING these days. Literally. It's spooky out there. VC's are running a simple equation that says, let's guesstimate when the carriers will start buying again and then subtract approx 1.5 years to figure out when a startup needs to get funded and start designing its box. That way the box will be more or less ready when the market returns.

Unfortunately, given the heavy debt load that almost all carriers have, most folks believe that the carriers will not run out of capacity and be forced to invest more CapEx until calendar '05. That's a tough number to come up with, but there seems to be a concensus building.

That means that boxes have to be in trials in Q4 of 2004 to make the purchasing cut for '05. It takes about 18 months from start to trial ready (obviously depending on how complex the box is).

If you believe this, and you believe that the VC's aren't complete idiots (many are, but many aren't) then look for telecom box funding to pick up sharply in Q2 and Q3 of next year, roughly 18 months ahead of a CapEx recovery.
TheChief 12/4/2012 | 9:26:14 PM
re: VC Funding: Drip, Drip, Drip smoking craters,

Good post with a very logical timeline. I hope that your 2005 estimate is incorrect and hope it's 2004 instead. I stress hope here, but I think you may be correct.
dljvjbsl 12/4/2012 | 9:26:49 PM
re: VC Funding: Drip, Drip, Drip
Hi

Here is a version that has actually been proofed. There should be fewer typos in this verson.


dljvjbsl


-----------------------------------------


Since I have my Ph.D, why would I attend a Community College?


I can remember taking a community college course on programming many years ago. It was called Programming for Scientists and Engineers.

I was surpised when several of the students infromed the class thayt they not only had Ph.D.s but held distinguished positions in both the academy and industry. I recall one describig himself as a professor of nuclear physics, another held the rank of chief engineer at a Fortune 500 company with a major reputation in research. There were several others with equivalent qualifications.

I guess that these distinguished people saw the prospect of learning as the reason for taking a class at a community college.

I suppose that this message has the nice benefit of putting down the authors of the rude interjection and its reply. This is not something that happens very often. Both implied that community colleges could not be of interest to Ph.Ds. I guess my experience and my respect for learning demonstrated conclusively otherwise.

--- dljvjbsl

For all you Ph.D.s out there determine the relavance of this name to the telecom industry. It is not random but has a subtle realtionship with one of the most signficant developments in telecom.

Hint - 1972-1979
dljvjbsl 12/4/2012 | 9:26:50 PM
re: VC Funding: Drip, Drip, Drip Since I have my Ph.D, why would I attend a Community College?


I can remember taking a community college course on programming many years ago. It was called \Programming for Scientists and Engineers.

I was surpised when several of the students infrored the calls thayt they not only had Ph.D.s but held distinguished positions in both the academy and industry. I recall one describig himself as a professor of nuclear physics, another held the rank of chief engineer at a Fortune 500 company with a major reputation in research. There were several others with equivalent qualifications.

I guess that these distinguished people saw the prospect of learning as the reason for taking a class at a community college.

I mgess this message has the nice benefit of putting down the authors of the rude interjection and its reply. This is not something that happens very often.oth implied that community colleges could not be of interest to Ph.Ds. I guess my experience and my respect for learning demonstrated conclusively otherwise.

--- dljvjbsl

For all you Ph.D.s out there determine the relavance of this name to the telecom industry. It is not random but has a subtle realtionship with one of the most signficant developments in telecom.

Hint - 1972-1979
diag_eng 12/4/2012 | 9:26:54 PM
re: VC Funding: Drip, Drip, Drip The Internet wouldn't be here without VC's (or the Government, or Universities for that matter).
----------------------------------------------

You forgot Al Gore.

diag_eng()
BBBoa 12/4/2012 | 9:26:56 PM
re: VC Funding: Drip, Drip, Drip
>>Dr. BBBoaYou Should Attend a Community College


BobbyMax,

Since I have my Ph.D, why would I attend a Community College?

Thank you for continuing to prove my point. Each post you make adds another layer to the "BobbyMax is a useless idiot" foundation.
AAL5 12/4/2012 | 9:27:06 PM
re: VC Funding: Drip, Drip, Drip
Why Bobby do you think BBBoa has developed this opinion of you?

It wouldn't perhaps be anything to do with the contents of your postings would it? No, how could I be so silly it is a BobbyMax hate email campaign that is going on.

Wake up Bobby you're not in Bell-Labs dream world now, wake up!

AAL5
BobbyMax 12/4/2012 | 9:27:07 PM
re: VC Funding: Drip, Drip, Drip Dear Dr. BBBoa:

Your hate e-mail and your vulgar words clearly exhibit me that you are a person of low class and very low intellect. You are not familiar with the recent history of the United States, nor do you understand the basic rules of decency.

Get yourself some education at one of the community colleges and read New York Times/Washington Post.
The Loopy Electron 12/4/2012 | 9:27:09 PM
re: VC Funding: Drip, Drip, Drip Chief...

The issue has less to do with realized losses than a lack of liquidity in the financial markets. A common problem with private equity is the ability to create a cash liquidity event within a reasonable timeframe-- especially in this market, which is, without a doubt, nefarious at best.

Most seasoned Sand Hill VCs have not realized the losses in their portfolios because they have not had exits on the respective "lossy" companies. In certain cases, doors have been shut at portfolios and big "0s" have gone into the excel column marked "total valuation upon exit."

However, such cases are actually few and far between compared to the number of companies that are actually managing to bump along with a few million of revenue per year, no major contracts and no major upside... or the companies that have drastically reduced their burn rates to the point where they can last several more years-- with no hope of major upside, but perhaps a sustainable business on the distant horizon. This is the category VCs call "the living dead."
In sum, the majority of losses have yet to be realized. And... they may never be realized. VCs are smart folks. When liquidity returns to the market, perhaps with a little bit of TLC from their VC backers, the "living dead" will have managed to transform their businesses into things with real upside. Time heals wounds; turnarounds are not uncommon. Look at previous economic downturns in the Valley for great examples. Also bear in mind that valuations typically do increase as M&A and public equity activity pick up.

However, if most VCs were to liquidate their portfolios today, the LPs would probably be very unhappy.
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