Venture Capital Hot on Communications, Internet

Investments for first nine months of '99 far exceed the total for all of 1998.

by Ted Stevenson ISP-Planet Managing Editor [November 17, 1999]

There are two upbeat messages for ISPs in the Money Tree Survey, released today by PricewaterhouseCoopers:

1. Technology is driving the economy as never before
   
2. Communications/Internet is the dominant force in the high tech sector, receiving nearly one-third of all VC investment for the year to date

In announcing the findings, James D. Atwell, Managing Partner of the Venture Capital Practice in the Global Technology Industry Group (the survey's sponsor), put it this way: "Technology companies are attracting venture capital at astounding rates. The increase in both absolute dollars and percentages is unprecedented.

"For the first nine months of this year, venture capital exceeds $21 billion, compared to about $14 billion in all of 1998."

Technology is strong
Taken together, technology-based firms set a record. Companies in Biotechnology, Communications, Computers & Peripherals, Environmental, Medical Devices, Semiconductors, Software & Information, plus Internet-based companies in other industry categories accounted for $8.1 billion, or 90 percent of all investments in third quarter 1999. This represents the highest dollar amount ever reported by the survey.

Communications is strongest
Tom Colligan, worldwide head of PricewaterhouseCoopers's InfoComm Business Advisory Services practice, focused on the performance of the hottest single industry sector: "The influx of venture capital money into communications companies provides clear evidence that this industry is a key driver of the new economy."

How big was that influx? Approximately $6.3 billion for the year—almost 30 percent of total VC investments for all industries.

Here's how the VC stakes in the communications sector broke down: About 29 percent of the $6.3 billion went to Internet firms—ISPs, e-commerce companies, and content providers. Equipment suppliers garnered a slightly higher share of the pie with 31 percent. A hefty chunk also went to telecom service providers, such as CLECs, DSL carriers, wireless and satellite services, and fiber networks.

Internet up sharply
All told, the Internet investment component—$1.9 billion over the first three quarters—represents a more than threefold increase over the same period of last year, and more than a doubling of the entire venture capital flow into this sector for 1998.

In another cross-tabulation of "Internet-related" companies that cut across all standard industry classifications, the total jumped to $5.5 billion, up from $1.1 billion in Q3 1998.

Jim Atwell noted, "The Internet was a driving factor for half of all companies. Every facet of the industry showed record increases, including business-to-business and business-to-consumer e-commerce, infrastructure, content and software."

Bigger in every way
Not only did the survey find higher total VC investment, it reported that the number of investment deals rose some 37 percent over the year previous, and the size of deals was, on average, 57 percent greater.

Some 37 percent of the total dollar investment in Q3 went to companies in the "formative stage." About one half of the companies that received venture funding fell into this category, each receiving, on average, $6.6 million.

Companies in the expansion stage-which garnered an average of $10.1 million each-grabbed roughly 27 percent of the total VC allocation.

More than 500 venture capital firms participated in the survey, and they in turn reported co-investment by an additional 200-plus firms, bringing the total number of participating investors to more than 700.

Jim Atwell offered a final perspective: "The pool of available dollars is getting bigger, too. It's becoming common in later stage financings for VCs and corporate or strategic partners to invest jointly. In short, there's plenty more where this came from."

—End

Read another recent report on VC activities in the ISP industry:
Venture Capital Courts ISPs.