Boom times ahead in networking?

After a dismal couple of years, networking start-ups are coming back, but the rising tide of venture funding isn't lifting all boats.

Jonathan Reeves, a three-time start-up founder, says it's a good time to be an entrepreneur.

When Reeves went looking for a second round of funding earlier this year for his current company, a telecommunications equipment maker called Mangrove Systems, he landed $21 million, bringing the total capital raised to $42 million. And more than six months after it closed its latest round of funding, new investors are still trying to give the company money, he said.

"It's not so easy for everyone," Reeves said. "But for the start-ups with solid teams who have done this before and who have a strong business plan, there's plenty of money available, and no short supply of people trying to invest it."

Venture capitalists and entrepreneurs agree that the technology start-up market has come back to life during the past year. Valuations for top-tier companies are on the rise and large companies, particularly big networking equipment makers such as Cisco Systems and Juniper Networks, are once again shopping for good acquisitions.

Cisco, traditionally one of the most prolific acquirers in all of tech, bought nine companies in the first half of 2005, including Wi-Fi switching player Airespace, for which it paid $450 million. It's continuing a buying spree that started the year before, when it bought 13 companies--up from just four the year before.

The Cisco indicator
"Our overall acquisition strategy has not changed," Cisco CEO John Chambers said during the company's fiscal fourth quarter conference call with analysts and investors in late July. "There's no magical number. It's more opportunistic. We still prefer small acquisitions with geographic proximity, usually a private company with about 100 employees."

That Cisco is comfortably back in acquisition mode should make entrepreneurs think about taking the plunge into networking and communications, say venture capitalists.

"Cisco is a good indicator of the market in terms of creating a belief set that there will be light of end of tunnel," said Steve Baloff, a general partner at the venture capital firm Advanced Technology Ventures. "You can see things are getting better. The quality of opportunities has gotten noticeably better and the venture capital community is responding."

That exuberance is not yet showing up in overall venture capital data, however. Venture capitalists invested $811 million in 91 networking start-ups, and $926 million in 114 communications start-ups in the first half of this year, according to a PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association Money Tree survey. That's about on par with investment last year.

Nonetheless, a research report that was set to be released Monday by the research firm The Carmel Group predicts substantial growth in California's communications sector thanks to increasing interest in so-called convergence technologies such as Voice over Internet Protocol, or VoIP. In California alone, the report predicts $5 billion to $7 billion in venture capital will be invested in the sector over the next three years.

Reeves, a veteran who should know a good start-up environment when he sees it, says the anecdotal evidence is already there. He has been through the start-up game twice in the last decade with companies that together sold for more than $3 billion. He founded his first, Sahara Networks, in 1995. Two years later, he sold the company to Cascade Communications, which later became a part of Lucent Technologies, for $216.5 million in stock.

In 1999, Reeves was back at it with Sirocco, a company that developed optical-edge switches used in building telephone

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