Demand for Internet bandwidth could spur venture investment

Network World - IT network companies are still struggling to secure investments from venture capitalists, but an "insatiable demand" for Internet bandwidth could fuel an eventual recovery in the market.

"Capacity for bandwidth is being absorbed at huge rates as people continue to offer more and more things over the Internet," says Tracy Lefteroff, a global managing partner of Pricewaterhouse Coopers (PwC). "When capacity gets constrained again they're going to have to add to the backbone and that ultimately is going to create demand for these products."

The latest MoneyTree Report from PwC and the National Venture Capital Association illustrates a continuing struggle for networking companies, particularly start-ups. In the third quarter, network vendors secured $1.2 billion in venture investments, slightly less than the second quarter investment level. As recently as 2007, network companies were pulling in about $3 billion per quarter.

Only about 7% of third quarter dollars went to start-up and seed companies. Just a dozen start-ups secured venture funding, while 209 early stage, expansion and later stage companies were able to find investors.

A recovery probably won't happen this quarter, but the market should ultimately rebound, Lefteroff says.

"If you look at the business cycles, I think we're through the worst of it," Lefteroff says. "We're somewhere on the upward slope. It's just a question of how quickly we're going to progress. I do believe the insatiable demand for bandwidth on the Internet is ultimately going to drive the demand for products in this space."

Good news for the mergers and acquisitions market includes Cisco's recent buying activity as well as Oracle's purchase of Sun, even though the latter has hit regulatory hurdles. What the industry needs, Lefteroff says, is increasing numbers of acquisitions and good valuations on these purchases to encourage investors to start putting money back in the networking space.

Hottest Tech M&A deals of 2009  

Here are the top 10 venture capital deals in the IT networking market for the third quarter. Network companies, as defined in this MoneyTree data cut, include computer software, hardware, peripherals and services; data, Internet, satellite and wireless communications; Internet software, e-commerce, digital imaging, computer graphics and other network-related technologies. Facebook secured a $100 million investment in the third quarter but is not included in this list.

1. Meru Networks

Location: Sunnyvale, Calif. 

Description: Develops converged Wi-Fi technologies.

Funding: $57.5 million

Investors: BlueStream Ventures; Clearstone Venture Partners; D. E. Shaw Group; Evercore Partners; Monitor Venture Management; NeoCarta Ventures; Tenaya Capital.

2. Calix Networks

Location: Petaluma, Calif.

Description: Develops products designed to accelerate fiber-based service deployment.

Funding: $50 million

Investors: Azure Capital Partners; Foundation Capital; Menlo Ventures; Riverwood Capital; Sprout Group; St. Paul Venture Capital.