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

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