2Q-2011 VC Investment Survey: Internet 2.0 Bubble while Telecom & Networking Start-ups Struggle for Funding!


The just released PricewaterhouseCoopers National Venture Capital Association MoneyTreeTM Report for 2Q-2011 contains some very revealing information about the amounts and types of companies venture capitalists (VCs) are investing in.


VCs opened their wallets and invested $7.5 billion in 966 deals in 2Q-2011. That was an increase of 19% in terms of both dollars and the number of deals compared to the first quarter of 2011 when $6.3 billion was invested in 814 deals. The quarterly investment level represents the highest total in a single quarter since the second quarter of 2008.

Internet Companies are Hot (or in Bubble 2.0)

Here’s an Eye Opener: Investment in Internet-specific companies surged in the second quarter with $2.3 billion going into 275 companies. That’s about one third of all VC money invested this quarter! It represents a 72% increase in dollars and a 46% increase in deals from the first quarter when $1.4 billion went into 189 deals. The second quarter marks the most dollars going into Internet-specific companies in a decade, since the second quarter of 2001!

Five of the top 10 deals this quarter, including the top two deals, were classified as Internet-specific investments, which is a discrete classification assigned to a company with a business model that is fundamentally Internet based, e.g. e-commerce, on line games or daily coupons, social networking, etc. These are generally software companies which have nothing at all to do with the underlying Internet infrastructure that they use to generate revenues (and hopefully profits).

Telecom and Networking Start-ups Continue to Suffer

In sharp contrast, there were only 29 deals totalling $169M invested in Telecom start-ups of all types (wireless, wireline, metro, WAN, etc). That was down from 35 deals worth $188M in the 1Q-2011 and basically flat from one year ago.

Networking and equipment companies fared even worse. They received only $115M in 21 deals in 2Q, which was flat from 1Q but DOWN from $303M in 24 deals one year ago!

Telecom combined with networking & equipment only accounted for 3.7% of all 2Q-2011 investments- an insignificant percentage, especially when compared to Internet related companies. As we have pointed out in several other articles, this does not augur well for future Internet infrastructure or for technology innovation in general.

San Jose Mercury had 2 recent articles about the Money Tree VC Survey, but didn’t accurately report the sorry state of telecom and networking start ups. In particular, this Sunday’s SJ Mercury VC report didn’t explicitly mention telecom start-ups http://www.mercurynews.com/business/ci_18664212?nclick_check=1

Saturday’s SJ Mercury article was more interesting:  Silicon Valley in another tech-stock bubble? (Really means private equity bubble, since the companies receiving huge investments and high valuations are NOT publicly traded)

“New figures from the National Venture Capital Association show more venture money poured into Internet startups last quarter — $2.3 billion — than in any period since the dot-com bubble, driven largely by investments in social media companies.”

While VCs are throwing lots of money at Internet start-ups, telecom and network equipment companies are struggling to get funding from VCs (or even angel investors)!

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More info on early stage company funding and the role of TiE Angels