VenCap is less freewheeling, more cautious than it once was.

Venture capital’s (VC) historical enthusiasm for getting rich quick by backing innovative communications start-ups with exciting new technology has given way to pragmatism and caution. VC money is still being spent in sporadic gushes, but these days investors always have a plan for cutting their losses.

There is definitely money out there, but with the bite of the recession, the lingering hangover from the dot-com bust and ongoing consolidation, VC investment in the cable, wireless and telecom industries has fallen off a cliff in the past few years.

VC dollars to the telecom industry declined by 72 percent in Q1 ’09, media and entertainment (the category including cable) dropped 45 percent, and networking and equipment was off 47 percent. Internet-specific companies, with just $556 million in VC funding, fell 31 percent. Overall, the VCs invested just $3 billion in 549 deals in Q1 ’09, according to the latest MoneyTree Report from PricewaterhouseCoopers (PWC).

Compare that with $25.5 billion in 3,416 deals in 2006 and it’s no wonder there’s a fundamental shift in how the VC and entrepreneurial communities view each other, and how they’re redefining and reinventing their funding strategies.

“There’s inactivity at the manufacturing level, and a lot of funded deals have been muted the past few years. The lack of spending in new infrastructure has trickled down. In the early 2000s, there was a huge amount of dollars invested by VCs in the cable, wireless and telecom industries. Now, they’re reluctant to put their toes back in the water,” said Tracy Lefteroff, global managing partner of the VC practice at PWC.

They at least might be nearing the water, however. “The VCs that got burned no longer exist. The industry is cleansing itself, and there is still a fair amount of optimism. But they’re cautious and want to see exit strategies,” she said.

Enter cable, which wrapped up a big expansion years ago but still needs to spend to broaden its services. “They’re interested in expanding services. The same with the telcos. They’re not buying hardware infrastructure,” Lefteroff added.

What the VCs are buying, albeit not with great vigor as of yet, is mobile services, a sector where wireless companies will spend about $3.1 billion in building Long Term Evolution (LTE) base stations in 2011, according to ABI Research.

The mobile sector has the attention of the VCs. “We’re looking at mobile and wireless with a little more optimism but haven’t seen tremendous exits occur. We’re also looking more aggressively at global markets. That’s exciting,” said Matt Niehaus, a partner in the VC group Battery Ventures.

Exciting, but today’s VC is also circumspect about where it places its bets with start-ups, most notably in the technology and manufacturing spaces.

Said Niehaus: “Some entrepreneurs are disillusioned, but the passionate ones will block out all the negatives, and their glasses will remain half-full. Our view is: We like it, but here are five things that could go wrong. How will you deal with them?”

Lauder Partners, a long-time investor in start-up technology companies in the cable and telecom spaces, has expanded its interests to include mobile, voice recognition and other sectors. And despite the VC meltdown the past few years, its managing director, Gary Lauder, remains upbeat about the innovations and opportunities.

“Innovation continues, and there are a lot of great opportunities. Although with cable, there are fewer because of consolidation. For start-ups, there’s a shift to new opportunities for capital-efficient companies because of new software tools. That’s an important change,” Lauder said.

Yet for start-ups such as Clearleap, a provider of network-based technology, the road to VC funding in today’s complicated, cautious and pragmatic investment environment is fraught with caution signs, with a high dosage of fright.

Braxton Jarratt

“Our first thought was, ‘Oh my God, we’ve quit our jobs for a hang-glider that hasn’t flown before.’ But our business needed an investment. It was crucial to have multiple customers tell the VCs they’ll buy it if it’s built. There’s tons of good ideas, but until a customer says they’ll buy it, from you, you never know,” said Braxton Jarratt, CEO of Clearleap.

There are signs that the VC community, particularly in the mobile, wireless and content sectors, may be testing the waters for start-ups – with one foot on the shoreline.

“There are lots of opportunities for mobile advertising, and we’re looking in that space. We’re also looking for a high-quality management team, market opportunities like small but rapidly growing markets, and companies with long-term differentiations. So the investment criteria haven’t really changed. Now is a great time to invest,” said Ken Elefant, general partner at Opus Capital, a VC focusing on start-up technology companies.

Just where the VCs are investing is the question. Added Elefant: “Enabling consumers to do things easier is a key for us. Carriers and cable operators are beginning to understand that, and moving faster than in the past.”

A recent Opus investment is Transpond (formerly iWidgets), which received $4.1 million in Series A money. “We talked with 10 VCs and negotiated terms with four or five, but they dropped out when the market cratered, so Opus funded the whole round. The VC portfolio companies are facing the same issues as the bigger media companies, so a start-up without an audience is brutal,” said Peter Yared, CEO and founder of Transpond.

But Transpond has endured, thanks to the relationships it built with the VC community. “Relationships were our biggest asset. This is a risky market, and the VCs have to trust you. The ones who know the market are the best positioned,” Yared said.

Canaan Partners, a $3 billion VC, knows the digital media and communications markets are appealing, along with wireless and mobile, and sees funding for start-ups in these sectors on the rise.

“There’s a lot more attention on the mobile space, so smaller start-ups are getting funded. In the next year, the smartphone market will be pretty vibrant, as well, along with the global market, and we want to get smart in the real-time search market,” explained Maha Ibrahim, general partner at Canaan.

Content, advertising guides, social media and the iPhone are areas of interest for Canaan, Ibrahim noted. But early start-up funding remains highly visible on its radar screen. “We’re very mindful of where our companies are selling and still look for big, early-stage ideas.”

ERF Wireless’ big idea was to not only fund its expanding wireless and communications business, but to act as its own VC.

“We secured an initial $6.5 million of VC funding from the family owned VC fund and additional funding from hedge fund companies,” said Dean Cubley, CEO of ERF Wireless.

As both a start-up and VC, ERF is uniquely positioned to understand both sides. Added Cubley: “In the past few months, we’ve been in front of 42 funds, so it requires more work and preparation. But money is available and sitting with a lot of investors who are looking for opportunities to invest. There’s more money on the sidelines than I’ve seen in a long time waiting to be invested. But the VCs are cautious, and the economy has tempered deals in that respect.”

Nevertheless, start-up companies continue to seek VC funding, though with a bit more trepidation than in years past, Cubley said. “It’s very difficult to get funding for pure paper companies with no track record. You need more than just a good idea. VCs want added security and comfort and a strong business plan. You’d better know what you’re talking about.”

What the VC community mostly talks about, concluded Niehaus, are innovations with a business plan. “We can’t fall in love with the technologies and must be able to break in and have an impact. We’re more skeptical around technology companies in communications and approach them with a higher bar. The opportunities for VCs have become much broader.”

SMALLER OPS LOOK FOR CAPITAL, VCs                                     
Access to capital and VC funding has always been a tough issue for smaller, independent operators, with a nasty recession adding to the painful process of securing capital.

CoBank, one of the few lenders that target smaller operators, believes there are opportunities for the smaller operator community, albeit with some caveats.

“It’s been very quiet this year, with most of the activity in the phone business, fiber-to-the-home or node, and additional backbone and video expansion. For the real small operators of less than 5,000 subscribers, they have little access to capital. Hopefully we’ll see companies like Charter start to spin-off properties they’re not investing in,” said Rob West, senior vice president of the communications lending unit at CoBank.

For smaller operators, however, there’s no single answer to finding access to capital, West admitted. “Fiber, faster broadband speeds and layering in voice products have been winners, and we’re seeing capex in those areas. We’re working with the ACA and the NCTA to expose ourselves to as many operators as possible. Bundling is also alive and well and should mean better access to capital for smaller operators.”

It may also lead to a more optimistic capital market. “All is not dire. You can find economies with bigger companies investing in rural assets and consolidating headends. Not everyone wants to get out of the business,” concluded West.