STMicro spins off Upek (part one of two... have to subscribe for part two...)(edit. If you "PRINT THIS ARTICLE" ;-) you get to see the whole thing...)
by Clifford Carlsen
Updated 12:39 PM EST, Mar-19-2004
STMicro spins off Upek
by Clifford Carlsen Posted 03:58 EST, 17, Mar 2004
Determining that the market for biometric security devices is finally here, chipmaker STMicroelectronics NV of Switzerland on Wednesday, March 17, spun off its Berkeley, Calif.-based biometrics unit, Upek Inc., landing $20 million in venture funding it believes will carry it to profitability.
Upek sought a syndicate with broad international support, and found its lead investor in Sofinnova Ventures of San Francisco, and its sister firm, Sofinnova Partners of France. Sofinnova and Upek recruited other investors in the round, which consists of Diamondhead Ventures of Menlo Park, Calif., Earlybird Venture Capital of Germany, and EDBV Management and Green Dot Capital of Singapore.
"We considered industrial investors, but decided to look for financial investors to get it done in the simplest way possible," Upek CEO Alan Kramer said. "We have a big development group in Prague and manufacturing in Singapore, so we focused on international investors using both our contacts and the contacts of the lead investors."
ST engaged Alper Cetingok of Morgan Keegan & Co. in Memphis as its investment banking adviser in the spinoff and funding of Upek. Stephen Stein of Thompson & Knight LLP in Dallas represented ST in the transaction. Upek used Warren Lazarow of O'Melveny & Myers LLP in Menlo Park, and the investors relied on Hyun Sun Kim of Heller Ehrman White & McAuliffe LLP, also of Menlo Park.
The spinoff culminates four years in which Upek has positioned itself outside its parent's core business to help establish biometrics as a viable technology for protecting access to physical spaces and data. The unit was originally formed to develop specialized chips for incorporation into OEM devices for security based on fingerprint recognition, but the company decided shortly after introducing its first products in 1999 that it needed to do more to promote the industry.
"In the first year we focused on a business model aligned with ST, selling sensors, but we went through some whiplash with companies that didn't have the right technology for using them," said Alan Kramer, an 11-year ST veteran who originated the project that became Upek, and now its CEO. "But we realized that in an early stage industry we couldn't survive as a component supplier, and moved up to provide solutions."
Upek's products consist of proprietary chips that integrate fingerprint readings with applications software to authenticate identity. The products have applications in large-scale physical security, including airport identification and building security, as well as data access control in computer installations, and increasingly, in portable devices including notebook computers and cell phones.
International Biometric Group estimated the biometrics market at $719 million in 2003, with expected growth to $1.2 billion in 2004 and $4.64 billion in 2008.
The company sells a combination of chip technology and integrated software that reads fingerprints and authenticates user identification, and connects with operating system software within a portable computing device or cell phone. Upek sells the full suite of technology for about $30 a unit, but also sells a stripped-down version for about half that.
Kramer said Upek moved further away from ST as it developed a market for its products, but recognized that it was better off remaining as a unit of the huge chipmaker. Biometrics has had huge promise as security concerns have widened over the last decade, and particularly after Sept. 11, 2001, but that the market has consistently underperformed expectations.
"This has always been a market that will break out next year," Kramer said. "We didn't want to make the mistake of going out when products were not fully baked."
Upek was further dissuaded from emerging early as an independent company after witnessing the failure of its high-profile competitor Veridicon Inc., which was spun off from Lucent Technologies Inc. of Murray Hill, N.J., in 1997, and spent more than $70 million in capital raised from investors including Santa Clara, Calif.-based Intel Corp., Germany's Deutsche Bank AG, UBS Warburg of New York and Hambrecht & Quist and Allegro Capital of San Francisco before being dismantled in 2001.
Kramer would not say how much money ST has put into Upek's development, but he said it is comparable to the amount Veridicom used. "Biometrics is not a business that anybody with a small bank account should get into," Kramer said.
ST will retain about one-third ownership in Upek, and remains closely tied to the startup as sole manufacturer of its products. The spinoff mirrors a deal in which ST incubated Gemplus SA in the early 1980s as it built a market for chips to recognize PIN codes, before selling it as an independent company.
Kramer said the company felt ready to stand alone shortly after Sept. 11, when customers stepped up incorporation of security features. But he said valuations were so bad at the time that ST opted to continue to support Upek internally.
Finally, when ST believed the timing was right, Upek began looking for outside investors, who he found were eager to invest in a mature company in an industry that seems to finally be taking off after years of disappointment.
"They had revenues and products in a lot of different areas of biometrics, and we were attracted based on a number of opportunities," said Eric Buatois, a general partner with Sofinnova Ventures. "Biometry is a big area of interest, but everybody looks at it with some caution because so many companies have failed."
David Lane, a general partner with Diamondhead, said traditional technology in biometrics has proved too expensive and not refined enough for widespread applications. But he said he's convinced Upek has proven it can supply technology for broad use.
The company already boasts portable computer companies including Samsung Corp. and Micron PC, both of South Korea, as customers, as well as security specialists including Identix Inc. of Minnetonka, Minn., Cogent Communications Group Inc. of Washington, D.C., and Sagem SA of France.
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