Corporations Slow Optical Investments
By Johnathan Burns
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--With investment in fiber optic companies dropping drastically from last year's record-setting pace, it may be no surprise that one of the groups holding more tightly to the purse strings is none other than the publicly traded telecommunications equipment companies themselves.
After investors poured more than $7 billion of venture capital into the fiber optic equipment and photonics sector last year, it was perhaps inevitable that investment would slow.
The dropoff, however, has been steep. In the fourth quarter of last year, more than $2.1 billion was put into the sector. That number dropped to roughly $1.3 billion in the first quarter, according to Kirk Walden, national director of venture-capital research at Pricewaterhouse Coopers.
And instances of telecommunications equipment companies investing in optical startups have dropped as significantly. Given the steep sell-off in their own publicly traded stocks, however, the pace of investment in private concerns by telecommunications equipment makers may seem contrary to overall market sentiment.
Last year, the venture capital arms of industry stalwarts Cisco Systems Inc. (CSCO) and Lucent Technologies Inc. (LU) made a total of 78 investments in the sector, Walden said. In the first quarter, that number dropped to 11.
"I think that shows that the (sector) may be reaching a saturation point," he said. "Once these corporate investors get their dance cards full, there's no need to add to it, unless there's a new technology out there."
Venture capital investments across the board slowed as the public markets - especially technology stocks - sagged last year. After venture capitalists invested $26.1 billion in private companies in the first quarter of last year, the total amount of cash invested in private companies dropped throughout the year. The total amount of U.S. venture capital invested in the first quarter was $10.1 billion. Investments in optical startups, at $1.3 billion, accounted for 13% of all venture capital allocated.
"Fiber optics was one of the few bright spots through 2000," Walden said. "Now it's pretty rough on everybody."
Lucent Technologies' venture capital arm, Lucent Venture Partners, made 33 investments last year, according to Pricewaterhouse Coopers.
So far this year, the company has done nine such deals, said Lucent spokesman Frank Briamonte.
"We do expect a slight slowdown in our investment rates in the next few months," Briamonte said. "Typically, July and August are slow for venture capital, just naturally. Also, the market conditions do have an impact on investing."
The market conditions have never been worse in the young sector. A handful of high-profile optical systems and component makers have repeatedly warned of weakening sales in the sector in the first half of the year and have commenced massive restructuring plans to deal with lower sales. There is not yet a sign that telecommunications carriers will increase their spending plans anytime soon.
During that time, Lucent's stock has gone from a high of almost $63 to a Tuesday closing price of $6.69 amid a slowdown in telecommunications spending and a rash of uncertainty around the company.
"Venture capital follows the public markets," Walden said, referring to the drop in publicly traded optical stocks that led to the decline in venture capital in the sector.
And corporate venture arms have more flexibility than traditional VCs, he said.
"There's not the huge pressure to invest that money," Walden said. "They can slowdown faster than VCs can."
Lucent's venture capital strategy is two-fold, said Briamonte. First, the company invests in companies that it believes will further its own product sales. Second, Lucent looks for investments that will bring the fund a healthy return.
"We're different from most funds in that we consider the strategic value to Lucent," Briamonte said.
The typical Lucent Venture Partners' investment ranges from $1 million to $5 million and is put into early stage funding rounds. Lucent has capitalized two venture capital funds since its inception in 1998 - a $100 million fund that is fully committed and a $150 million fund that closed in January of last year that is not yet fully committed. Lucent intends to continue to invest in the sector, with plans being developed for a third fund.
Last year, Lucent acquired one of its venture-backed companies, optical networking firm Chromatis Networks. Other Lucent-backed startups like Newport Communications and Mainspring Inc. were purchased by Broadcom Corp. (BRCM) and International Business Machines (IBM), respectively, within the past year. In all, the company discloses 48 companies that it has funded, ranging from equipment and software makers to e-commerce consulting firms.
"We usually look to do about one or two investments a month," Briamonte said. "Last year, the number of investments was unusually high. we simply react to quality of deal flow, and saw a larger number of attractive opportunities last year."
Promising technology, however, will still draw corporate venture capital.
Private equipment and software maker Akara recently closed on a $30 million second round of funding, including a contribution from optical fiber maker Corning Inc.'s (GLW) venture capital arm, Corning Innovation Ventures.
Akara's Chief Executive Ed Ogonek said Corning's investment is the result of a strategic partnership. Akara's products would improve enterprises connections to optical fiber - increasing the demand for more high-speed equipment and connections.
"If we deliver on the promise of lower cost for fiber optic services, it will create broader demand for optical fiber," he said. "There's still corporate activity going on in venture capital, it's just that there are a lot of people who have share their investment activities with their restructuring activities. It's definitely a more difficult market than it was 18 months ago."
-By Johnathan Burns, Dow Jones Newswires; 201-938-2020; johnathan.burns@dowjones.com
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