Net VC: Past Its Prime?
By Paul Bonanos
Even analysts can't agree about the state of Internet venture capital. While VentureOne reported that funding of Internet companies in the second quarter fell short of the previous quarter's total for the first time in years, new figures from two other research firms indicate a slight rise in investment flow. PricewaterhouseCoopers showed an 8 percent increase in Internet funding, while Venture Economics reported a 6 percent growth.
Regardless of the trend, many sectors of the Internet industry are clearly hurting. E-commerce seems to have taken the hardest hit: According to VentureOne, e-commerce companies pulled in 3 percent of venture funding during the period, down from 14 percent a year ago. E-commerce startups that received funds were awarded an average valuation of $21.5 million, about one-fourth of their median worth during the last quarter of 1999. Content firms, which account for 4 percent of investments, received the smallest average round, $12 million, although their median valuation rose significantly.
E-commerce companies' loss may be connectivity- and infrastructure-developers' gain, as those sectors now account for a quarter of all venture financings. If investors are wary of weak business models among retailers and content providers, they seem confident that consumers and businesses still want faster and more powerful connections.
Internet service providers, which received about 12 percent of the funds invested in Internet companies, had the highest median valuation at $187 million. Infrastructure companies, whose average valuation rose by more than a third, received nearly 30 percent more funding.
"I see a trend toward technology and away from business models," says Peter Wagner, a general partner at Accel venture capital. "E-commerce companies and content startups are seen as new dot-com marketing concepts backing unproven,! smart, young guys. People are asking questions they didn't ask so pointedly a couple of quarters ago."
As a result, investors are choosing the safe route by investing in established companies. While seed funding and startup funding fell by one-fifth in the second quarter, companies in expansion rounds received 50 percent more money during that period, according to PricewaterhouseCoopers. "There's a tendency among infrastructure companies to land larger first rounds," says Wagner. "These aren't new MBAs from Stanford - these are experienced people with a lot of domain expertise. They're working with proven technology, and they see a lot more $20 million first rounds."
The third quarter may bring more of the same, as telecom and DSL companies land large rounds of funding, while startup consumer-focused dot-coms fail to secure crucial venture rounds. And while it's certain that the growth rate of Internet funding has slowed, Venture Economics estimates that Intern! et companies still garner 80 percent of all venture investments.