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. As recently as 2007, network companies were pulling in about $3 billion per quarter. In the third quarter, network vendors secured $1.2 billion in venture investments, slightly less than the second quarter investment level.
Only about 7% of third quarter dollars went to start-up and seed companies. 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. Just a dozen start-ups secured venture funding, while 209 early stage, expansion and later stage companies were able to find investors. It's just a question of how quickly we're going to progress. 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. 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.
Hottest Tech M&A deals of 2009 Here are the top 10 venture capital deals in the IT networking market for the third quarter. 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. 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. 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. Funding: $50 million Investors: Azure Capital Partners; Foundation Capital; Menlo Ventures; Riverwood Capital; Sprout Group; St. Paul Venture Capital. 3. SecureWorks Location: Atlanta Description: Provides network security services.
Description: Develops products designed to accelerate fiber-based service deployment. Funding: $31.5 million Investors: Noro-Moseley Partners; undisclosed firm. 4. Convey Computer Location: Richardson, Texas Description: Develops hybrid-core computing products, which combine x86 technology with hardware-based, application-specific instructions to accelerate high-performance computing applications. Funding: $24 million Investors: Battery Ventures; DCM; Globespan Capital Partners; Trinity Ventures. 6. Greenplum Location: San Mateo, Calif. Description: Develops data warehousing and analytics technology. Funding: $24.2 million Investors: Braemar Energy Ventures; CenterPoint Venture Partners; Intel Capital; InterWest Partners; Rho Ventures; undisclosed firm. 5. Amalfi Semiconductor Location: Los Gatos, Calif. Description: Operates as a fabless semiconductor company. Funding: $22.1 million Investors: Mission Ventures; Sierra Ventures. 7. VeriVue Location: Westford, Mass. Description: Develops networking technology for distribution of digital media services.
Funding: $20 million Investors: CMEA Capital; Menlo Ventures; Redpoint Ventures. 8. (tie) Tremor Media Location: New York City Description: Develops an online video advertising technology. Funding: $20.1 million Investors: Accel Partners; Comcast Interactive Capital; Matrix Partners; North Bridge Venture Partners; Sigma Partners; Spark Capital; undisclosed firm. 8. (tie) Schooner Information Technology Location: Menlo Park, Calif. Description: Provides data access appliances for Internet data centers. Funding: $20 million Investor: SAP Ventures. 10. Teachscape Location: San Francisco Description: Operates a Web-based application platform for delivering teacher development courses. Funding: $18.3 million Investors: ABS Capital Partners; Sprout Group Follow Jon Brodkin on Twitter: www.twitter.com/jbrodkin