Attacking the niche: VCs new mantra

Date:   Thursday , February 01, 2007

According to the MoneyTree Report, venture capitalists pumped in $1.5 billion into the semiconductor space during the first three quarters of 2006 as compared to $1.4 billion financing during the first three quarters of 2005. This increase shows VC’s new ventures in this mature sector.

In the past few years, VCs invested in companies if the entrepreneurs had created an incremental improvement in an existing technology or product. Now, VC’s say, entrepreneurs must display an exponential improvement—a great leap over what’s available in the marketplace. If one were to look at the pattern of investments, VCs are looking for niche areas within the semiconductor space.
‘Niche’ being the key word, Vijay Parikh, Managing Principal, Global Catalyst Partners, is betting his money on Micro-Electro-Mechanical Systems (MEMS). He observes that many of the products found at this year’s Consumer Electronics Show (CES) utilized MEMS. What excites Parikh is that MEMS enables entrepreneurs to focus on niche technologies , along with low-risk manufacturing and affordable up-front expenses.

As an enabling technology that allows the development of smart products, MEMS is promising to create a complete system-on-a-chip by bringing silicon-based microelectronics with micromachining technology. MEMS are small mechanical movements embedded in a semiconductor that acts as the specialized sensors to the microelectronic integrated circuit, which is opening a new realm of chip designs and applications.

One of the major applications of MEMS observed by Parikh is the HDTV products and projectors; Texas Instruments being a strong contender in this field today with its DLP (Digital Light Processing) technology. DLP chips —matchbook-size devices that reflect light off millions of hinged micro-mirrors to create images on a TV or projector screen — are one of the most successful MEMS ever developed, with more than 10 million shipped for TI since 1996. Parikh is intrigued by how TI leveraged this unique capability to its advantage. “Products built around MEMS will give large returns,” he says, “It also allows you to be differentiated in the marketplace.”

MEMS also finds application in medical electronics. Corey Mulloy, general partner, Highland Capital Partners considers implantable hardware an ideal target market, since it can exploit recent advances in low-power wireless chipsets, materials, and MEMS. A device designed to monitor a diabetic patient, for instance, might trigger a bedside alarm for spikes in blood sugar levels instantly sending continuous data to a doctor.

Analog mixed signal (AMS) is also being narrowed down as a hotbed for investment. Combing mixed-signal and digital signal processing (DSP) into integrated circuits (IC), AMS’ demand is seeing a hike with rapid consumption especially in communications and consumer segments driven by the increased demand from portable electronics, 3G handsets, network upgrades, by the Asia Pacific region. Analog’s increased consumption in communication industry is estimated to grow at 16 percent annually with market approaching $24 billion in 2012.

Another area gathering lot of interest is semiconductor applications- utilizing the entire infrastructure to solve a very specific problem. Observes Philip “Flip” Gianos, General Partner Interwest Partners (fund size: $600 million) “specific application knowledge while aiming at certain more niche applications could be the answer to succeed in this area that is already swarmed with like minded investors cashing in at this field.
Creating capital equipment that facilitates the production of chips has emerged as the dark horse for VCs this year. While the rest of technology and infrastructure segment of the business turns harder to add value to, this portion in infrastructure is growing by the day. According to industry research outfit, Strategic Marketing Associates, the global chip industry will spend $60 billion on new chip equipment in 2007, and start production in around 29 new chip fabs, and as many as nine more DRAM (Dynamic random access memory) fabs.
Semiconductor manufacturing companies are ordering new capital equipment, expanding capacity to accommodate the upturn in industry demand. A recent Value Line Investment Survey noted a hike in bookings for leading-edge technologies such as 300 mm wafer production equipment and products that handle small-geometry (sub-100 nanometer) chip designs. The surprise package in the survey was the increase in order for older-technology 200 mm equipment, since the technology represents a cost-efficient method of ramping up chip capacity with faster production. Going by the trend, public investors are optimistic about the stock-price performance for the semiconductor equipment companies in the first quarter of 2007. Even for private investors, VC’s believe there are still some opportunities for new company in capital equipment sector.

Flip of General Partners believes that capital equipment would soon start moving across geographies. Agrees Parikh of Global Catalyst: “you have to ask yourself if the designers, the fabs, the packaging and the test are in Asia and over time the consumers also in Asia, how is it that the capital equipment for them is being built overseas?”
For instance AMEC, a company started by a bunch of ex-employees of Applied Materials (U.S), is now building semiconductor capital equipment in China to sell to the Chinese fabs. Today, the network of the capital equipments companies can be Dutch, American or Japanese, but by the looks of it Asia is gaining
prominence in this sector.