Networking, telecom leaving VCs cold

The overall amount of venture capital invested in startups is on the rise, though the networking and telecom industries haven’t been big contributors of late.

The latest numbers from the "The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA)" based on data from Thomson Reuters show that networking and equipment companies grabbed $111 million in venture funding in Q1, down from $138M in Q1 last year and $114M in Q4. However, there were 15 deals, up from 14 in Q1 last year and 12 in Q4, with companies such as Big Switch Networks garnering $13.8 million in funding.

Telecom startups had a similarly mediocre showing, with $142M in funding, down from $254M in Q1 last year and flat with Q4.

BEST OF 2010: 25 new IT companies to watch

Some $1.1 billion was invested in software firms, up from the $809M invested in Q1 last year and down from the $1.2 billion put into such companies in Q4. Much more funding for network-related companies is going into software and services and Internet companies, these days. An example: Software-as-a-service company Box.net pulled in $48 million in fresh funding during Q1. What's more, some of the venture firms (Accel Partners, Bessemer Venture Partners) that have traditionally invested heavily in U.S. tech companies have been closing new $1B-plus funds focused largely in investments outside the U.S., such as India and China.

One caveat, too, is that categorizing companies for the purpose of this survey is tricky, with some companies that could really fit into more than one category.

Nevertheless, reps from PwC and the NVCA took away positives from the overall numbers, which included $5.9 billion in funding of 736 companies .  After all, seven of the 17 MoneyTree sectors experienced double-digit increases in dollars in the first quarter, including Semiconductors , Industrial/Energy, and Financial Services.

"The first quarter investment total is setting us on a path for a solid level of investing in 2011.  While we did see a drop in deal volume, the dollars invested remains strong," noted Tracy Lefteroff, global managing partner of the venture capital practice at PwC US.  "Accordingly, we're seeing an uptick in average deal size, which hit $8 million in Q1for the first time since the first quarter of 2007.  And, in the first quarter, 14 companies received funding rounds of $50 million or more, with four of those deals worth more than $100 million.  We haven't seen this many deals worth $50 million or more in a single quarter since the third quarter of 2001.  This is a clear indicator that VCs are seeing innovative companies walk through their doors and that the entrepreneurial spirit of America is alive and well and thriving."

Half of the big money winners are in the industrial/energy category, though enterprise virtualization company Appsense cracked the top 10 courtesy of a $70 million investment from Goldman Sachs.

Speaking of start-ups, we’re compiling our annual list of 2011 network companies to watch – a list of enterprise IT  focused startups that have emerged since September 2010 or will emerge soon (as in, have announced their first product or come out of stealth mode or announced initial funding during that time). For this list, we are not looking for more established firms and those that have already gotten plenty of ink and awards. The idea here is to introduce our readers to new companies. The overall list will be divvied up into categories depending upon how many companies we select and which categories they fall into. Exactly when stories will run is to be determined. Please send candidates to Bob Brown at bbrown@nww.com with a subject line beginning with CTW:

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Tags SaaScloud computinginternetbusiness issuessoftwarevirtualizationinvestmentscorporate issuesReutersSoftware as a serviceEthernet SwitchLAN & WANNVCapitaThomsonNational Venture Capital Associationventure funding

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Bob Brown

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