1Q02 VC funding: A mixed bag of good and bad results

By Rachel Robinson
WaferNews Associate Editor

Semiconductor-related venture capital funding bucked the negative trend in 1Q02, remaining flat from the last quarter of 2001, according to the PricewaterhouseCoopers/VentureEconomics/National Venture Capital Association MoneyTree Survey.

Is flat a good thing?

It is compared to the steep VC funding declines realized by related technology industries.

Chip-related VC funding totaled $409 million in 1Q02, 6.6% of the total $6.2 billion awarded to all sectors combined. With the average percentage earned by chip companies usually hovering around 5%, the 6.6% is among the high points of the results. A low point, according to Raman Chitkara, global managing partner of the semiconductor industry group at PricewaterhouseCoopers, is that only seven companies received early stage funding.

“That aspect is not encouraging,” he stated. “The overall investing environment is lethargic. There is no sector that is performing so well that everyone is flocking to it. The new companies are going to struggle to get financing. VCs are committed to older companies.”

Of the 29 semiconductor companies that received VC cash in 1Q02, only one company deals in equipment. That company, GT Equipment Technologies Inc. (GTi), Nashua, NH, also happens to be among the seven companies that received early stage funding.

Founded by Kedar Gupta, president and CEO, and Jonathan Talbott, executive VP of sales and marketing, GTi has found a way to expand during the downturn and continue to prosper while much of the semiconductor industry is mired in last year’s downturn.

Formed in 1994, GTi designs mechanical parts, including vacuum and high pressure chambers, and other systems for materials processing. It designs control systems and integrating sensors to allow for total automation, and it models crystal growth processes, including fluid flow, heat and mass transfer, temperature profile, and stress calculations. Its products include float zone furnaces, stockbarger and sublimation furnaces, slim rod crystal pullers, ribbon pullers, HP furnaces, GaAS crystal and InP crystal pullers.

The company is in the process of building a $4.6 million, 57,500 square foot building in Merrimack, NH, to house its entire business. According to Talbott, GTi is projecting revenue growth in FY02 and FY03, after having grown steadily since FY99. Seventy percent of its FY02 production will be shipped oversees. The company has an established presence in Algeria, China, France, Germany, India, Japan, Norway, the Ukraine, and Italy.

According to Talbott, much of GTi’s focus is on R&D. It specializes in R&D for new commercial markets, customer relation projects and processes, and government funded programs.

“We spend 5 to 10% on R&D,” Talbott told WaferNews. However, he was quick to make the distinction that GTi is not a “research for hire company.” He said that the company engineers products for its customers, and that all the products it sells get delivered.

Mohan Chandra is GTi’s director of R&D. He holds six patents with 15 pending, and has been published in 32 technical journals. The company is linked to U. of New Hampshire, UMASS Lowell, SUNY Stonybrook, SUNY Albany, Georgia Institute of Technology, Florida International U., and NREL. GTi receives R&D funding from government agencies including DOE, DOD, the NSF, and the EPA.

The company, according to Talbott, was attractive to VC investors because of its management team, its patents, and its proven track record, among other things. Talbott said that the company does plan to go IPO at some point, but would not pinpoint a time.

In addition to being the lone equipment startup earning funding, GTi also stands out because of where it is located. Silicon Valley-based companies, as usual, received by far the largest piece of the semiconductor VC funding pie, 56.1%, or $230 million. New England was home to only three companies, GTi among them, that received funding. The location earning the second largest amount of funding was LA/Orange County, CA, with $68 million, or 16.6%.

All in all, total VC funding for 1Q02 was bleak. The total number of investment dollars dropped 24% quarter-over-quarter. A total of 787 companies received backing compared to 994 companies in 4Q01.

The semiconductor industry was not immune. Twenty-nine semiconductor companies received funding this quarter – 39 did in 4Q01. Another negative, Chitkara noted, was that we are seeing a year-over-year decrease as well. In 1Q01, 35 chip companies received funding, and the total dollar amount in the first quarter of 2002 is 11% below its 2001 counterpart. But, as with many of the results this quarter, the news is not all bad.

“On a positive note,” Chitkara pointed out, “the semiconductor decrease is much better than the year-over-year decrease of national numbers. The decrease in the semiconductor sector is marginal compared to the rest of the investment [community].” He referred to the total of $10.1 billion raised by all technology sectors in 1Q01 compared to the $6.2 billion earned in 1Q02. Maybe the chip sector’s 11% decline isn’t so bad after all.

Another piece of positive news is that all signs seem to be pointing upward. “When you look at the semi industry itself, there have been improvements in matrixes (e.g., book-to-bill). So, all the positive developments should help the semiconductor investment environment,” Chitkara said.

He said that if the semiconductor segment embarks on a sustained level of improvement, the numbers would start going up.

“Even though they are separate investors, the private markets are affected by what is going on in the public market. If you start to see a lot more IPOs and stocks that are doing well – a sustained level of improvement – you’ll see a lot more excitement in VC investing in the semiconductor industry,” Chitkara pointed out. “The two parts are tied to each other, though they are different investors.”

So what does the future hold? Chitkara warned not to expect any significant boost in funding next quarter. It could be down, or maybe flat. But, a look further into the future could be promising. A time frame for that, however, was something he could not provide.



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