In the fourth quarter of 2001, VCs participated in 90 funding rounds and invested $1.39 billion into communications, networking, and optical networking companies, according to VentureOne. For the entire year, they invested about $8.4 billion, compared to the $23 billion invested during 2000 (see VCs Work a New Angle).
True, the total amount of investment dollars is shrinking, but communications and networking companies attracted the same percentage of the total venture investments during 2001 -- about 26 percent -- as they did a year earlier (see VCs: Startup Opps Still Abound).
What’s getting funding? Most recently, companies such as Atrica Inc., Xanoptix Inc., Big Bear Networks, and Turin Networks Inc. won new funding for either offering carriers a way to prolong the life of their installed voice equipment or offering systems vendors a way to design systems that are above and beyond today’s specs (see Atrica Closing in on Third Round, Xanoptix Lands Cash, Launches Product, Big Bear Hugs $40M, Turin Trolls In $50M).
Table 1: Largest VC Deals in Q401 ($M)
|Cogent Communications Inc.||$62.10|
|Cereva Networks Inc.||$51.00|
|Gluon Networks Inc.||$50.00|
The catch? Most rounds now are down rounds, especially for companies funded in 2000. “A lot of the term sheets from venture investors contain some really onerous terms,” notes Turin Networks CEO John Webley. “And investors are watching your burn rate very carefully.”
Those startups that are seeking funding have to jump through more hoops than ever -- such as clearing out their unsecured debt before new investors agree to offer a term sheet (see OptiMight: Check's in the Mail and Startup Endgame Still a Puzzle). Or, like PhotonEx Corp., companies have to do some house cleaning in personnel before VCs will continue to back their plan (see PhotonEx Axes Staff ). And, while valuations are stabilizing, the time between a fresh funding round and a follow-on round is getting longer on average (see Have Startup Valuations Stabilized?).
Another sign of the times: VCs spent more to restart companies in 2001 than in previous years. They spent about $127 million on restart financing rounds in 2001, versus about $121 million in 2000 and $119 in 1999, according to VentureOne. A restart occurs when a startup significantly changes its business plan but continues working under the same articles of incorporation. A washout financing round is usually involved (see Washed Out in the Valley and Tachion Trolls for Cash).
While the herd of optical startups continues to thin, here’s a sign that the private equity market may be settling down: VCs are now facing less competition from angel investors and corporations. During the bubble days of late 1999 to early 2000, non-VC investors contributed almost 25 percent of the dollars raised by venture-backed companies, according to VentureOne. By the fourth quarter of 2001, this figure had fallen to 12 percent, close to its historical norm.
— Phil Harvey, Senior Editor, Light Reading