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Some telecom start-ups back in the money

The funding climate for tech start-ups may have soured over the past few months, but several deals announced Monday indicate times are sweeter for some communications companies.

The funding climate for technology start-ups may have soured over the past few months, but several funding deals announced Monday indicate times are sweeter for some communications companies.

Q-Optics, Ikanos Communications and Spatial Wireless have succeeded in securing financing.

The funding comes amid a harsh environment for many start-ups and is a departure for the communications market, which many venture capitalists shied away from after months of bad news from the sector. But some of these VCs believe solid communications start-ups will emerge and they continue to invest cautiously.

"Four out of five companies will probably be out of business within the next 18 months," said Roland Van der Meer, a partner at ComVentures, which specializes in communications companies. "(But) the survivors are getting funding now."

• Ikanos raised $25 million for its third round led by Walden International, which brings total funding for the communications chipmaker to $42.5 million. JPMorgan Partners and Ridgewood Capital each anted for the first time in the third round, along with major existing investors like Anthelion Capital, Greylock Partners, Sequoia Capital and Telesoft Partners.

• Q-Optics reaped $11 million in its first funding round led by Warburg Pincus, which was accompanied by the Hatch Group, Brobeck Phleger & Harrison, Taylor Winfield, Collaborative Capital and Q-Optics' founding investor VenturiFX. The company makes software that allows carriers to quickly find the bandwidth in its network for a particular connection.

• Spatial Wireless pulled in $8.1 million in its first round of funding. Austin Ventures led the round along with Sequoia Capital and Genesis Campus. Spatial was founded in January and makes switches for wireless networks.

But despite their success in attracting capital, these companies and others face some long odds.

Funding for venture-backed companies as a whole fell to $8.2 billion during the second quarter, from $10.4 billion in the previous quarter, according to a PricewaterhouseCoopers MoneyTree Survey in partnership with VentureOne.

The survey indicated that communications companies accounted for $1.3 billion of the $2.8 billion decline, with funding for fiber-optic equipment and photonics companies falling by $733 million.

Some people within the venture capital industry think that in the next few months the industry will get worse before it gets better. Van der Meer says ComVentures believes that the "nuclear winter" in funding will last another year to 18 months before things begin to thaw.

Even as the turnaround begins, investors say that it will not resemble the communications VC market of the past, which skyrocketed from $1.05 billion in 1998 to $22.8 billion in 2000.

In the meantime, the balance of power has decidedly shifted toward the VC firms who control access to the shrinking pie of funding.

"The environment in terms of supply and demand is certainly more attractive," said Robert Pavey, a partner at Morgenthaler. "Demand for capital from entrepreneurs will fall more slowly than the amount of capital available."

On the bright side, telecom-related companies will probably grab most of the available funding, if history is any guide. According the MoneyTree Survey, the communications sector was the top money raiser in every year from 1995 to 2000, except in 1999 when it finished second.

Times of chaos might also foster opportunity. Some investors maintain that opportunities exist even in down times. "We think that downturns are always great times to invest," said general partner Lorraine Fox of Crescendo Ventures. "Companies that get funding now will come out of the gate stronger."