In a lackluster market for U.S. venture capital, telecom firms are increasingly turning to newer and more creative sources of funding. Depending how you measure it, VC investment in telecom was either up slightly or down last year: In “telecom,” it was up less than 5% last year, according to PricewaterhouseCoopers, but in “networking and equipment,” it was down 27%. Investors say early stage funds are especially tough for telecom start-ups to come by.

One source of funding that firms are tapping increasingly these days is a private investments in public equity (PIPE). Companies typically offer unregistered stock at a discount (say, 5% to 10%) to a limited group of investors, followed quickly by the registration of that equity for resale into the public market. Sometimes the private offering includes warrants for future purchases as further enticement. Once seen as a desperate move, PIPEs are increasingly popular for combining the speed of a private placement (closing in just days or weeks rather than months) with the liquidity of a public offering. They are also less expensive to obtain. Especially popular among small or unprofitable firms, they do come with risks, such as dilution and the potential shift of large chunks of corporate control. Investors face some risk in that they are restricted from selling the shares for the first few months, sometimes longer. But according to John Dexheimer, a partner with investment firm First Analysis Private Equity, PIPEs offer 12% to 15% annual returns.

First used in the biotech sector, PIPEs have spread to other industries, including telecom. Optical component vendor Bookham Technologies has repeatedly tapped the PIPE market, most recently in a $31 million round last fall. And Level 3 Communications took a PIPE earlier this year. In 2006, the total amount of PIPEs in the U.S. rose 38% to nearly $28 billion.

“There's more money in the PIPEs market than the VC market,” Dexheimer said. “If you're a small company, you can effectively live forever.”

Companies are also increasingly going outside the U.S. to tap the public market. The vast majority of today's IPOs happen outside the U.S., Dexheimer said, as geographical boundaries fade and the world flattens out. “Ignis Photonyx went public in Norway, its operations are in Denmark, and it leads the [market] share in [FTTx] in Korea,” he said. “It's like making this up if you would have said it six years ago.”