Tech Investors Cautiously Return
By MATT RICHTEL
December 17, 2001
Marty Katz for The New York Times
Jim Fraine, chief executive of Neocera Inc., a start-up company that makes equipment for computer chip companies, was driving to Logan International Airport in Boston when news of the terrorist attacks came over his car radio. In addition to the grief and shock he felt, Mr. Fraine took a deep breath for his personal setback; he had hoped to remember Sept. 10, not the 11th.
The day before the hijackings, Mr. Fraine had pitched his company to venture capitalists in the Boston area to try to raise several million dollars in seed capital. When he heard the news of the attacks, Mr. Fraine said, he feared that his chance to get a positive response from the investors had gone from long shot to "hopeless — just hopeless."
Mr. Fraine should hope he turns out to be a better entrepreneur than prognosticator. Within weeks, the venture capitalists made an offer to Mr. Fraine's company, based in Beltsville, Md., and at least one other group of investors is now competing to back Neocera, whose technology is used to check computer chips for design flaws.
While venture capital investment, the bread and butter of technology start-ups, is far down from the highs of the dot-com bubble, it is by no means dead. Indeed, venture capitalists and entrepreneurs point to a number of types of technologies that interest them and which they may invest in during the year ahead.
Among those technologies are nanotechnology computers built using minute processors; Web services software that moves business functions onto the Internet; biotechnology; and wireless technologies. In fairness, though, it is tough to generalize about the main sectors, because there are some 700 venture capital firms nationwide, and many of them focus on different niches. What is easy to identify is what is not being widely financed: consumer-oriented Internet companies.
The billions of dollars poured during the late 1990's into companies that provide content like news and information, or into online retailers, was an anomaly for most venture capitalists. Historically, they have focused on core technologies, niche software and hardware products, which often are far less sexy than the glamorous world of Internet start-ups; the venture capital world has long backed the technologies described in the pages of Scientific American, not the fads in Teen People.
And some venture capitalists, many of whom call themselves science geeks but who have a gift for marketing, say they are quite happy to be going back to being boring. Indeed, just hearing them talk about the latest technologies is enough to put an insomniac into a deep slumber.
"One of the holy grails is a tunable optical laser," said Sean Foote, a partner at Labrador Ventures, a venture firm based in Palo Alto, Calif., sounding like an 8-year-old describing the advent of the Nickelodeon cable channel.
Simply put, Mr. Foote said, if optical lasers were tunable, meaning they could be programmed to send different colors of light down fiber optic networks, then a single laser could replace many individually programmed lasers, reducing costs for network operators and users. In addition, Mr. Foote said, he is looking at other technologies that could cut the costs of building networks, including figuring out how to wire homes with high-speed networks and with wireless Internet access.
"Security is a huge area," he added. "Antivirus protection, intrusion detection — look at the things in a chief information officer's purchase list, and security is the last thing" to be eliminated.
Labrador Ventures invested in a security start-up called Green Border Technologies Inc. last May, an investment that underscores a second trend in the industry. While Labrador is seeking new investments, it has not put money into a new venture since Green Border. The slowdown may continue through 2002.
According to the National Venture Capital Association, an industry trade and research group based in Arlington, Va., venture capital firms in the United States invested $7.72 billion during the third quarter of 2001, a 73 percent decline from the period a year earlier. Further, 81 percent of the investment in the third quarter of 2001 was made as follow-up financing of existing portfolio companies, indicating how tough it is for start-ups to attract venture capital dollars.
Among those companies that have attracted funds is ReefEdge Inc. of Fort Lee, N.J., which makes software to secure and manage wireless networks, like wireless Internet access for offices. Ethan D. Ayer, a senior associate for Allegra Partners, the New York venture capitalist firm that backed ReefEdge in August, said wireless technology would attract attention from investors in 2002. "It's not a question whether wireless networks will take off," he said, "it's a question of who the winner will be."
His firm, too, remains interested in the broad category called Web services, a phrase that may well become a catchall to describe many companies that receive venture financing in 2002, according to the investors. Others call it "metaware" and refer to it as the next stage in the evolution of software. At the heart of the wide-ranging category is the idea that business functions can be moved onto the Internet, and away from both proprietary networks and proprietary hardware systems, like automated teller machines.
Some venture capitalists say they are looking at technology that would let a company send updates to software across different operating systems, devices and computers. Rather than updating all servers and computers individually, they could do it once, and send it across an entire system.
There continue to be hardware investments too, as is the case with Neocera, Mr. Fraine's company. Founded in 1989, the 35- person company uses magnetic resonance imaging, commonly known as M.R.I., to look for shorts in integrated circuits. The company's device, which looks like a microscope, would be used by makers of semiconductors to see if there are flaws in newly designed microprocessors.
Mr. Fraine said the technology, already used by some chip makers, could save companies one to four weeks in detecting flaws. "Time measured to market can be hundreds of thousands of dollars a day," he said. For some popular, name-brand chips, like the Pentium, "it can be measured in millions of dollars an hour."
Mr. Fraine declined to say which venture capital firms had offered to back his company. But Labrador Ventures, which also has offices in New York, has said it is considering making an offer to become one of the company's backers.
Discussing such technologies, Mr. Foote of Labrador Ventures said, "It's not real sexy, except the part where they make a lot of money." |
