Communications Wrap: Public Markets Dropping the Line

At the close of the third quarter, the communications sector appears to be losing its grip on the shaky public markets. The sector grabbed just 14.5% of the total number of venture-backed initial public offerings during the third quarter, down from 18.5% in the second quarter, according to our VentureXpert database.

“We [have experienced] an incredibly tough couple of quarters,” said Adam Goldman, general partner at communications-focused Centennial Ventures, based in Denver. He added that there has been a long-overdo market correction that has begun to successfully weed out nonviable business strategies while strong companies have become even more potent.

The benefits deriving from the correction, however, include valuation decreases, higher-quality companies moving into the spotlight and the management talent pool increasing. Goldman said that the latter development is especially important because it is a group which has been spread far too thin.

The largest communications public offering of the third quarter was CoSine Communications Inc., which went public on September 26 with a post offer value of $640 million. Based in Redwood City, Calif., the switches and software developer was backed by ComVentures, Crescendo Venture Management LLC, Eagle Ventures, Kleiner Perkins Caufield & Byers and Worldview Technology Partners, among others. The offering price for the stock was $23, compared to today?s opening price of $46.12.

The technology meltdown has, generally speaking, led venture firms to focus on companies like as CoSine, because they have proven technologies and significant growth, said Doug Ingram, a principal analyst at Boston-based research and advisory firm, Daedalus Venture Group LLC. He added that this pattern has led VCs to often make later-stage investments than in the past, sometimes reducing the upside for the investors, but also reducing the risk.

Avici Systems Inc., which priced on July 28, was the second-largest communications IPO of the third quarter, raising $406.1 million. The North Billerica, Mass.-based firm transmits large volumes of data over high-speed fiber optic networks. The offering price for the stock was $31, compared with yesterday?s closing price of $80.37 a share. Accel Partners, Brentwood Venture Capital, Nortel Networks Corp. and Oak Investment Partners backed the company, in addition to others.

Third quarter communications offerings pale in comparison to the largest deals done in the sector during the first and second quarters. First quarter highlights included Carrier 1 International SA, which raised $3.21 billion, and UTStarcom Inc., with a post offering value of $2.34 billion, and Avanex Corp., which raised $2.25 billion, according to our VentureXpert database. The largest post offering values of communications companies during the second quarter ? smaller than the first quarter but larger than the third ? were Sonus Networks Inc., which raised $1.4 billion, and ONI Systems Corp., which raised $1.1 billion.

“The market today is very selective in terms of who it wants to support,” said William Collatos, managing general partner at Spectrum Equity Investors, a communications-focused firm with offices in Menlo Park, Calif., Boston and London. He said that the market is skewed toward hardware vendors in the optic space, as well as software vendors, with service providers coming in a distant third.

Alissa Leibowitz is senior editor with Venture Capital Journal.