VC focus on ISPs and Web apps

VC focus on ISPs and Web apps

The venture capital community remains bullish on the Internet economy, pumping a record $US15 billion into business services, network software and telecommunications startups in the second quarter of this year, according to the latest Price- waterhouseCoopers LLP/Network World Venture Capital Survey.

Despite a downturn in the valuation of Internet stocks that began in March, the second quarter saw a 20 per cent rise in network-oriented investments over the $12.5 billion spent in the first quarter of this year. Altogether, venture capitalists have invested $27.55 billion in network companies this year - $4 billion more than was spent during all of 1999.

Although overall investments were up significantly, the funding shifted dramatically away from e-commerce companies toward ventures offering Internet access and applications. Among the hottest areas of investment were application service providers, broadband service providers and outsourcing firms offering enterprise-class Web hosting and management services.

"The network area is still one of the bright spots," says Tracy Lefteroff, managing partner of PricewaterhouseCoopers' Venture Capital Practice. "This is going to continue to be a growth industry as everyone retools and re-equips their portion of the Internet backbone to accommodate new technologies coming out like fibre optics, wireless and broadband."

The second quarter of 2000 was a record breaker on all measures. Altogether, 960 network companies received an average of $15.6 million each during the second quarter. Both figures were up significantly over the first quarter, when 886 network companies received an average of $14.14 million each.

The second quarter of 2000 saw more than triple the amount of venture capital funding than the second quarter of 1999, when network-oriented investments first began to skyrocket. During spring 1999, venture capital firms invested $4.77 billion in 506 network companies, with an average investment of $9.4 million.

The biggest increase for the quarter was in Internet applications and tools providers, which captured $2.85 billion, up 35 per cent over the previous quarter. Business service providers such as Web hosting firms snared $2.99 billion, up 24 per cent over the past quarter. And access and infrastructure companies, including ISPs, captured $1.87 billion, an increase of 11 per cent.

"For corporate network managers, the trend is toward outsourcing," Lefteroff says. "As they bring Internet tools into their own businesses, hosting and other services along those lines may be a better way to go than making all the investments internally."

Meanwhile, investments in B2B and B2C Web sites plummeted to $1.58 billion and $1.36 billion, respectively.

"It's all about the business of the Internet, the business of networking," says Kirk Walden, national director of PricewaterhouseCoopers' Money Tree Survey, which tracks venture capital investments in all segments of the US economy, including networking. "The companies that are getting funded are not companies that a consumer might see. In sharp contrast to a, consumers will never know who these companies are."

Industry observers see no end in sight to the amount of deal-making in the network area. Indeed, PricewaterhouseCoopers predicts that the network segment of the economy will end up raking in more than $55 billion in venture capital funding by the end of 2000 - more than double the amount spent in 1999.

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