Investors wary of networking start-ups

Eight years later, technology bubble has lingering impact

Venture capital funding for networking start-ups is hard to come by these days, because investors still taking a hit from the excesses of 1999 and 2000 have limited the amount they're willing to spend on new companies in favor of later-stage players.

Networking investments "generally have not performed up to expectations," says Tracy Lefteroff, global managing partner of Pricewaterhouse Coopers' private equity and venture capital and life sciences industry services. "In the 1999 to 2000 timeframe, so much money was thrown at this sector, you kind of had an inundation of new technologies, devices and capacity. It's taken a while for the Internet world to absorb that capacity in new products."

Investments in networking companies -- including hardware, telecom and Internet-related technology -- reached a high of US$67 billion (AU$76 billion) in 2000 before dropping off dramatically. Investments have remained between US$11 billion and US$11.6 billion each year from 2004 to 2007, according to the PricewaterhouseCoopers MoneyTree Report.

The lion's share of that money, more than US$9 billion a year, is poured into expansion and later-stage companies. Even though the total networking investments rose slightly from 2006 to 2007, the amount invested in early stage and start-up companies dropped from US$2 billion to US$1.8 billion.

That means venture capitalists are carrying a heavy load of companies originally funded in the late '90s or early this decade, but haven't been able to cash in on those investments to their hearts' content. The longer those investments stay in their portfolio, the lower the rate of return will be, and at some point venture capitalists will start losing money, Lefteroff says.

"Until they get liquid on a lot of those portfolio companies, there's no incentive for them to crank up additional amounts of money in the sector," Lefteroff says. "It's been a very tough sector for venture capitalists to make money in over the last five years."

This trend will obviously make it harder for entrepreneurs to be successful with new companies developing networking technology.

"It affects the rate of new company formation," Lefteroff says. "Unless you've got some killer idea, it's tough to get funded in this space."

Wireless and mobile applications are performing well, however, and Lefteroff expects interest in that technology to remain high.

"I think that's going to continue, absolutely," he says. "The hardware companies have done a great job making all these wonderful devices. Now the challenge in the industry is how do you push all the content out to these mobile devices?"

Social networking and Web 2.0 are getting a lot of attention from investors, but those technologies were not included in MoneyTree's analysis of networking-related investments.

One wildcard that could affect future investments is the capital gains tax. Lefteroff says venture capitalists worry the current rate of 15% could be raised if a Democrat wins the presidency.

Nationwide, venture capitalists spent US$29.4 billion in 2007, more than each of the previous five years.

Join the newsletter!

Error: Please check your email address.
Rocket to Success - Your 10 Tips for Smarter ERP System Selection
Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Jon Brodkin

Network World
Show Comments

Cool Tech

Breitling Superocean Heritage Chronographe 44

Learn more >

SanDisk MicroSDXC™ for Nintendo® Switch™

Learn more >

Toys for Boys

Family Friendly

Panasonic 4K UHD Blu-Ray Player and Full HD Recorder with Netflix - UBT1GL-K

Learn more >

Stocking Stuffer

Razer DeathAdder Expert Ergonomic Gaming Mouse

Learn more >

Christmas Gift Guide

Click for more ›

Most Popular Reviews

Latest Articles

Resources

PCW Evaluation Team

Edwina Hargreaves

WD My Cloud Home

I would recommend this device for families and small businesses who want one safe place to store all their important digital content and a way to easily share it with friends, family, business partners, or customers.

Walid Mikhael

Brother QL-820NWB Professional Label Printer

It’s easy to set up, it’s compact and quiet when printing and to top if off, the print quality is excellent. This is hands down the best printer I’ve used for printing labels.

Ben Ramsden

Sharp PN-40TC1 Huddle Board

Brainstorming, innovation, problem solving, and negotiation have all become much more productive and valuable if people can easily collaborate in real time with minimal friction.

Sarah Ieroianni

Brother QL-820NWB Professional Label Printer

The print quality also does not disappoint, it’s clear, bold, doesn’t smudge and the text is perfectly sized.

Ratchada Dunn

Sharp PN-40TC1 Huddle Board

The Huddle Board’s built in program; Sharp Touch Viewing software allows us to easily manipulate and edit our documents (jpegs and PDFs) all at the same time on the dashboard.

George Khoury

Sharp PN-40TC1 Huddle Board

The biggest perks for me would be that it comes with easy to use and comprehensive programs that make the collaboration process a whole lot more intuitive and organic

Featured Content

Product Launch Showcase

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?