Investors are wary of investing in start-ups because they have poured millions of dollars into existing companies that have not yet provided liquidity in the form of IPOs or mergers and acquisitions, says Tracy Lefteroff, a global managing partner of Pricewaterhouse Coopers (PwC).  ( of recent mergers and acquisitions.)

"I couldn't point to anything that's done really well [in the networking sector]. The whole space is suffering," Lefteroff says. "If [investors] don't see liquidity on the horizon it's going to be tough to justify funding a lot of new companies in this space."

Lefteroff predicts that the number of deals and dollar amounts will continue to drop.

Venture capitalists in the third quarter invested US$2.07 billion in 328 networking companies, including makers of hardware, , network-related software and Internet-related technology, according to data provided to Network World by PwC and the National Venture Capital Association, authors of the quarterly MoneyTree Report. That's the lowest quarterly total since 1998's first quarter, when investments were just less than $2 billion. It's also the fewest number of deals in any quarter since 1996.

Investments soared during the dot-com boom, surpassing $15 billion in each quarter during 2000. Venture funding became much scarcer after the bubble burst, but investments generally remained steady at between $2.5 billion and $3 billion per quarter each of the past five years.