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Networking, Software Have Room to Expand

Posted on: Saturday, 6 August 2005, 00:00 CDT

Aug. 6--It pays to network.

Software and networking companies were able to wolf down a generous helping of venture financing during the spring. Networking firms doubled their share of the total venture pie for the Bay Area, according to the latest MoneyTree survey.

Software companies still landed the most bucks, about $420 million, in the April-June period. That amounted to a roughly 23 percent share of the funding handed out by venture capitalists in the Bay Area, according to a Times analysis of data from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association

"Market opportunities continue to expand for software," said Steve Tennant, an Orinda-based consultant who advises software executives about obtaining venture financing. "There are new things continually coming down the pike that allow new software applications to be created by new companies."

The MoneyTree report suggests the tech sector, despite its recent travails, is once again a major propellant for the Bay Area economy.

The quarterly survey shows that tech strength emerged on multiple fronts. Software remained the top industry receiving funding, networking companies saw a huge surge, and semiconductor firms made a strong showing.

"Wireless applications and VoIP (voice over Internet protocols) are getting most of the attention," said Deepak Kamra, a general partner with Menlo Park-based Canaan Partners. "Cellular, WiMax (systems that can weave together computing devices in high-speed networks) and mobile consumer products are at the forefront of interest. These things are all changing the way people communicate today."

Pleasanton-based Five9 Inc. has developed VoIP technologies that enable companies, especially small ones, to place their call centers anywhere in the world more cheaply than conventional call centers.

"When voice just becomes another form of data, you can undertake all sorts of interesting operations at call centers," Kamra said.

Systems such as those developed by Five9 and other companies may be especially appealing to small companies. That's because the set-up, deployment and operating costs are so modest, said Brian Silverman, president and chief executive officer with Five9.

"We have opened up a whole new way for companies to reach their customers," Silverman said.

These kinds of technologies help companies create what amount to outsourced, Internet-based call centers for the little company.

"People can use this system to run call centers out of their home or from anywhere in the world," Silverman said.

Venture capitalists provided Five9 with $12 million in financing during the second quarter, the MoneyTree survey showed.

"If you can use a computer to handle calls, you could have call centers all over the world, but your operation would look like one big group of people," Kamra said. "The Internet gets rid of the price you pay for distance."

Some Silicon Valley stalwarts see plenty of potential in small networking and communications firms, said Tracy Lefteroff, a global managing partner with Pricewaterhouse. They are using their own money to signal that interest.

"Cisco Systems and Juniper Networks have acquired some companies," Lefteroff. "And because you see some companies such as this buying up networking firms, you see that this sector is having a rise in activity."

The networking sector could also get a boost if the telecommunications industry revives. That's because networking companies provide some of the equipment that telephone companies need, said Steve Bengston, a managing director with Pricewaterhouse.

If telecommunications companies upgrade their equipment, that would be another big boost for the beleaguered tech and communications markets. Telecommunications has languished since the dot-com bubble popped.

"Carriers around the world are starting to buy equipment again," Bengston said. "That is hopeful because telecommunications was Death Valley for much of the post-bubble era. Telecom networks are aging. So to stay competitive, especially with the new communications systems, they are going to have to take advantage of the most interesting stuff out there."

Networking companies in the Bay Area landed $338 million in financing, about 18 percent of the venture money deployed in the region during the second quarter.

Biotech companies consumed the third-highest chunk of financing. Venture capitalists steered $326 million to biotechnology firms. That's a 44 percent gain from the amount of biotech funding during the same quarter of a year ago.

The loot for biotech amounted to 17 percent of the $1.87 billion in venture capital invested in private Bay Area companies in the second quarter.

"Biotech has bounced back very nicely," Lefteroff said. "We're definitely seeing an upward trend for biotech."

The top recipients of venture funding in both the Bay Area and the East Bay during the second quarter were biotechnology companies.

Alameda-based Cerexa Inc., which is developing medicines to treat patients with life-threatening infections, hauled in $16 million. Palo Alto's Jazz Pharmaceuticals Inc., which makes products to help with a patient's neurological and psychiatric treatments, attracted $100 million in venture funding.

Rounding out the top five industries, semiconductor companies received $188 million in financing. Medical devices companies in the Bay Area obtained $140 million in financing.

Still, the bright pictures for high tech and biotech were tarnished in spots by weak performances from a few specific industries within those sectors.

Computers and peripherals companies suffered a 44 percent nose dive in funding in the second quarter compared with the year before. And even if venture capitalists embraced networking equipment and services companies, the financiers stayed away from telecommunications startups: Funding for private telecom companies in the Bay Area plummeted 53 percent from the year before.

And while biotech showed plenty of muscle, other components of the life sciences industry were decidedly flabby. Funding for medical devices companies in the Bay Area plunged by 46 percent.

Industry executives believe the pace of venture financing will remain relatively steady in the Bay Area, probably in the range of $5 billion to $6 billion a year. This sort of activity would be well below the eye-popping level of financing during the dot-com era that peaked with $34.7 billion in venture funding for Bay Area companies in 2000.

Yet that would be just fine with venture executives. They don't want another dot-com bubble.

"The high level of financing in years past could not be sustained and caused more harm than good," Bengston said. "It caused an ugly free fall when companies started to be closed down."

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Copyright (c) 2005, Contra Costa Times, Walnut Creek, Calif.

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Source: Contra Costa Times (Walnut Creek, Calif.)

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