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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
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.
Iipoed 12/4/2012 | 9:27:11 PM
re: VC Funding: Drip, Drip, Drip Why do we get up and go to work every day-to make money. WE all have different jobs. Some are engineers, some are CEOs, some are salespeople, some are facilities people and some are VCs. They are in their business to make $$. I do not respect most VCs but they do have a right to make $$ for themselves. So if the "poor" investors want to give them their money instead of putting it into AAA rated tax free bonds so what.

To sit around and berate them accomplishes nothing other than venting personal frustrations. Hey be thankful you have time to spend on these silly posts and you are not in some god forsaken country where all that matters is your next meal.

I can't wait for the responses to this post.
jbhollen 12/4/2012 | 9:27:12 PM
re: VC Funding: Drip, Drip, Drip My uninformed opinion is that VCs historically had a 1 in 10 chance of hitting a winner and running to the bank. Now it takes some real work and REAL RISK when investing in a start-up. Most VCs want near gaurenteed returns to invest anymore. They're a pretty risk adverse bunch these days.
go_to_the_light 12/4/2012 | 9:27:12 PM
re: VC Funding: Drip, Drip, Drip
Shot of penicillin will take care of that.
whyiswhy 12/4/2012 | 9:27:13 PM
re: VC Funding: Drip, Drip, Drip ...now is the best time for VCs to fund very capital efficient start-ups, what with low real estate costs, cheap surplus equipment, lots of top talent looking for work...

But instead, we see the opposite. One might be tempted to conclude that (50%) of VCs were banking on exiting in under three years. When three years came and went with no exits they were broke: flameouts.

But that would be so out of character.

-Why?
achorale 12/4/2012 | 9:27:14 PM
re: VC Funding: Drip, Drip, Drip I am starting to believe he is a creation from the LR staff to keep us coming back to these message boards
BBBoa 12/4/2012 | 9:27:14 PM
re: VC Funding: Drip, Drip, Drip Will everyone just please ignore BobbyMax. He's either:

A. During the course of his pathetic and bored existence, posting inflammatory comments to see how many people actually respond to his useless drivel, or

B. A complete moron who knows nothing about telecom, optical networking, VCs, or anything remotely related, or

C. Both A & B

Not once have I ever read his posts and came away with an inkling that he's a functional employee anywhere. As long as someone continues to respond to his idiocy, he'll keep on posting useless messages.
jboyd65 12/4/2012 | 9:27:15 PM
re: VC Funding: Drip, Drip, Drip >> The VCs are are also to blame for the Giants not winning the World Championship

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

Was that the "World" Championship that only allows teams from the US and Canada to participate ?
kz1x 12/4/2012 | 9:27:15 PM
re: VC Funding: Drip, Drip, Drip they certainly have't helped with your spelling or grammar, either
God 12/4/2012 | 9:27:18 PM
re: VC Funding: Drip, Drip, Drip BobbyMax
You are absolutely right.

The VCs are are also to blame for the Giants not winning the World Championship
smoking_craters 12/4/2012 | 9:27:21 PM
re: VC Funding: Drip, Drip, Drip Bobby:

You're right. VC's suck. They never achieve anything. They just take people's money, spend it on expensive cars and loose women and then go to prison. They never built anything. They're just worthless carpetbaggers. Or maybe not.

Let's see. I just typed this on a computer whose parts were made by companies started by VC's. The software was written by a company funded by VC's. It got served up through a box made by a company funded by VC's. When it left this building it was carried by a company funded by VC's. It exited my building via a router built by a company started by VC's. It probably traversed one or two long haul networks built by companies funded by VC's. And then it got to your end.

Any or all of those things (computer, software, server, network) could have been built by bigger companies, but they weren't! Big companies don't innovate as much as small companies do.

The Internet wouldn't be here without VC's (or the Government, or Universities for that matter). Sorry, Bobby, you'll have to find someone else to blame for your troubles.
TheChief 12/4/2012 | 9:27:26 PM
re: VC Funding: Drip, Drip, Drip The VC companies have squandered the wealth of the investors, individuals. Many pension funds have disappeared.
=================================================

Bobby do you even know what VCs are? When you say "have squandered the wealth of the investors, individuals", can you back that up and show me one VC company that overall, has lost money! The only pension funds that would be affected by VCs are ones that are invested in the VC, so can you name one pension fund that has lost on a VC investment?
BobbyMax 12/4/2012 | 9:27:28 PM
re: VC Funding: Drip, Drip, Drip In spite of the very high level of VC finding there is no evidence that these fundings have done any good to the common good of the telecom imdustry. The VC companies have squandered the wealth of the investors, individuals. Many pension funds have disappeared.

Our telephone infrastructure is more or less perfect. Of the many companies, that I have seen receiving funding has done any thing profound. Many teams were formed and funded by the VCs without any regard to the technology. VC have provide 3-4 years of comfortable living. And then these guys seek another funding and do the same thing they previosly did.
BobbyMax 12/4/2012 | 9:27:29 PM
re: VC Funding: Drip, Drip, Drip In spite of the very high level of VC finding there is no evidence that these fundings have done any good to the common good of the telecom imdustry. The VC companies have squandered the wealth of the investors, individuals. Many pension funds have disappeared.

Our telephone infrastructure is more or less perfect. Of the many companies, that I have seen receiving funding has done any thing profound. Many teams were formed and funded by the VCs without any regard to the technology. VC have provide 3-4 years of comfortable living. And then these guys seek another funding and do the same thing they previosly did.
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