U. S. News – Communications Runs On a Steady Engine –

NEW YORK – The communications sector has seen modest but relatively steady growth in the venture funding it receives each year – representing an increase to about 33% of all venture investing in the first three quarters of 1999, up from 27% in 1998. And communications-oriented VCs expect continued growth in venture investing, especially in light of recent successful deals, international deregulation efforts and increasing demand for communications services.

Recent PricewaterhouseCoopers Money Tree Survey results reflect a steady upward trend in communications, confirming the insight of leading venture capitalists who believe the phenomenon is here to stay for some time.

In 1995, communications investments accounted for about 22% of total venture investments. After decreasing to 21% in 1996, the figure grew to 25% in 1997.

“The communications industry is at the core of what I believe is our century’s economic revolution,” said Tony Abate, principal at the Wellesley, Mass.-based Battery Ventures. He sees the global trend of telecom deregulation, along with an increase in demand for services, as two of the main reasons for the high levels of capital being poured in the sector.

Another attractive feature of the communications sector is that “these days an entrepreneur can take a company public faster on a great story and hype with less revenue than previously expected,” Abate said.

Benchmark Capital’s Andy Rachleff attributes the phenomenon to the recent performance of communications companies, particularly of networking enterprises. “For the first time in a while, we’re seeing networking companies going public with great results, instead of being acquired.” In his opinion, companies such as Sycamore Networks Inc., the optical networking products manufacturer, have produced the “best rewards for risk” taken by venture capitalists.

The faster-than-expected development of broadband technologies is a catalyst for the growth of the communications sector according to Peter Wagner, general partner at Accel Partners in Palo Alto, Calif.

“We’re seeing great demand for advanced services from ISPs, which are thus under pressure to upgrade infrastructure, which is a very capital-intensive process,” he said. Venture capitalists readily provide this capital because of past performance and future prospects in the communications industry.

Although very competitive, a lot of the new technologies are difficult to deploy and adapt to the existing technologies of incumbent communications companies, Wagner said.

This creates the perfect set of circumstances for competitive local exchange carriers (CLECs) and other telecom service companies such as DSLs, wireless providers and satellite services companies to emerge and quickly become commanding presences in their markets. Equipment providers also enjoy high demand for their products. For these reasons, both subsectors have attracted venture capital, Wagner said.

“We have a virtuous circle formed by new carriers willing to take risks on equipment start-ups because they have higher adaptability to new technologies,” he added.

Data in the Money Tree survey supports Wagner’s opinion: of the $6.3 billion invested in communications in the first nine months of last year, 24% went to telecommunications service providers such as CLECs. Equipment suppliers received 31% of the venture capital pie, 89% more than the same period in 1998.

What is the next stage of this phenomenon? Battery’s Tony Abate estimates that “next we’ll see the convergence of voice, data and video network, as well as similar growth abroad.”

In December, Britain’s telecom regulator, the Office of Telecommunications (OFTEL), announced its decision to unbundle local loops, allowing carriers to use British Telecom’s (BT) network to compete with BT and essentially creates the environment that led to the emergence of CLECs in the U.S. “Exciting times are ahead,” Abate said.