Hardware/Software Wrap: No April Funding Showers In ’01

Although venture capital disbursements in the computer hardware/software sector had the second strongest showing behind Internet-specific companies for Q1 2001, they still didn?t come close to keeping pace with last year?s frenetic outpouring of VC dollars. According to preliminary figures from our VentureXpert database, just $2.172 billion went to 219 domestic hardware/software companies in the first quarter of this year, a 54% decrease from the same period last year, which saw 400 companies ? nearly twice as many enterprises ? receive more than $4.8 billion in private financing.

The picture didn?t improve much in April. It seems a slowing economy, dismal earnings reports from major public-market players like Cisco Systems and declining corporate spending have continued to take a toll on private sector investments in the hardware/software space. Preliminary data indicates that VCs pumped just $569 million into a mere 58 firms last month, whereas a whopping 156 companies secured slightly more than $2.3 billion for the same period last year. Moreover, the average amount invested in each company was sliced almost exactly in half from April 2000, with VCs pumping a paltry $21 million, on average, into individual firms this year, compared with a mean of $43 million during the same time last year.

Telecom Tremors Bring Hard Times

Perhaps part of the reason for the dramatic drop-off is that, besides getting hit with the backlash from large corporations that have reigned in information technology spending, computer hardware and software makers are feeling the heat from recent tremors in the telecommunications sector.

Specifically, over the last five years or so, venture capitalists have funded a whole host of telecommunications carriers, giving rise to a boom in network components suppliers. However, now that the carrier community isn?t thriving as it once did, those suppliers are hard-pressed to gain and keep customers.

“When your customers have the flu, you have pneumonia,” said Jim McLean, a partner with ComVentures, a Palo Alto, Calif.-based VC firm that invests almost exclusively in communications companies. “Right now, new [technology] is on hold, and we?re looking at companies that can do it better, faster, cheaper. New creation? is a long way off. These guys may have good technology, but no one is interested in implementing new technology just for the sake of being new.”

Still, some companies managed to strike it rich in April. The month?s biggest winner was Rearden Steel Technologies Inc., which captured a respectable $67 million from Mayfield Fund, Vulcan Ventures, Macromedia Ventures, and big-name strategic backers like AOL Time Warner, The Washington Post and Cisco. Rearden makes hardware and software products for home entertainment systems.

NetLedger Inc. was the second-closest contender, with a $30 million infusion led by StarVest Partners. The San Mateo, Calif.-based company is an application service provider (ASP) that delivers a Web-based accounting platform that enables small businesses to run their companies completely online.

By far, the greatest majority of the hardware/software companies ? 32 to be exact ? that nabbed VC dollars last month hail from outside the U.S. On the domestic side, California took the lion?s share of the cash, with 12 firms getting funded last month. Massachusetts placed a distant second, with VCs doling out money to seven enterprises.

Contact Robyn Kurdek: Robyn.Kurdek@tfn.com