Commercialization Issues of MEMS/MST/Micromachines:
An Updated Industry Report Card on the Barriers to Commercialization
Roger H. Grace
Roger Grace Associates
Microelectromechanical Systems (MEMS), Microsystems Technologies (MST), and Micromachines, collectively known as M3, have experienced a slowdown in growth in the year 2002. This has been the first slowdown of this industry in the last decade. In addition to the changing market dynamics, especially evident in the high-technology sector, many M3 companies have been plagued with numerous shortfalls associated with early-stage business, even though many of them have been in business for many years. This paper will discuss the major factors necessary for survival and successful development of companies involved in the M3 industry and objectively track the past performance of the industry in overcoming the barriers to the commercialization of M3. The "Industry Report Card" assigns grades to these various critical success factors and tracks their change during the 1998-2002 timeframe. The topics this paper addresses constitute the areas that have seen the greatest change from their previous grade...
Commercialization Report Card
The M3 Commercialization Report Card (Table 1) has been updated yearly since its inception in 1998 at the Hilton Head Conference. The Report Card, an attempt to define the criteria for success for M3 companies, provides an objective grade of performance to date. The change is the difference in grade between 2001 and 2002. As can be seen, the most significant changes in the grades are associated with the financial aspects of the business. Venture capital attraction and creation of wealth changed most dramatically. The gains created during the 1998-2001 "bubble" were downgraded to "C" in 2002. Other changes that occurred were positive. Market research changed from "B-" to "B+" and the industry roadmap changed from "B+" to "A-". There were no other grade changes from the previous Report Card. The following paragraphs provide the rationale for these changes.
Market Research (Grade = B)
In February 2002, the European Union organization Nexus published its follow-up study, "Market Analysis for Microsystems II: 2000-2005". This study was largely developed from the Nexus User Supplier Clubs and, as such, provides both a "top-down and bottom-up" classical approach to market research. It appears to be the most comprehensive study on the topic yet. Nexus published the first version of this study in 1998.
At least ten other studies have been published since 1990, when the seminal Microsystems Market Study by Batelle Frankfurt was published. Most, if not all, of these were conducted before the downturn in the economy and before the extreme downturn in the optical telecom sector. The Nexus report, because of its recent publication, tends to avoid this error.
Industry Association (Grade = B+)
Our prior report gave an "incomplete" grade to this subject. Since that time, the MEMS Industry Group (MIG) has been formed as an industry association to support the advancement of M3. Also, the founding of the Micro and Nanotechnology Commercialization Education Foundation (MANCEF) in 2000, although not established as a formal industry group, has set out to perform many of the functions of a classical trade group. Those include the development and management of the annual Commercialization of Micro and Nanosystems Conference (COMS), creating and developing an extensive industry roadmap, and being a major supporter of M3 standards with the Semiconductor Equipment and Materials International (SEMI) organization. MANCEF has over 500 members worldwide. Although Nexus has not been formed as a trade association, many of its functions, especially its very successful 'user-supplier groups' have appearances similar to those of classical trade associations. Nexus' membership has grown to 1400 members since its inception in 1992.
Venture Capital Attraction (Grade = C)
Before 1999, virtually all M3 companies had been considered too risky for most investors, especially venture capitalists. Most MEMS companies did not satisfy a number of the critical criteria for venture capitalist and private investor ("angel") funding. Among these are a unique product concept, a strong management team with demonstrated industry successes, a large and well-defined (vis-à-vis formal market research) market size and growth rate, a served market, a target market definition, and a significant return on the investors' capital within the first five years of operation. However, with the advent of MEMS-based cross-connect optical switches, this situation has changed dramatically. BioMEMS companies, including Aclara, Affymetrix, Caliper, Cepheid, and Orchid, have all gone public over the past three years and some have enjoyed large capitalization due to the explosive stock market and generous valuations associated with biotechnology stocks. These valuations occurred in early 2000; however, the downturn in the U.S. securities market, especially in the technology-rich NASDAQ market, has greatly reduced these companies' values. Venture-capital spending has moved from an "A" grade in 2001 to its present grade of "C". First-round funding is minimal in all sectors of the high-tech community, especially in telecom. This is also so in the M3 sector. Many of the acquiring companies' stock prices have fallen between 75-80% since their highs of March 2000 to their current values. Cronos, having previously been sold to JDS Uniphase for $750M in early 2000 was sold to MEMSCAP in July 2002 for $8M. JDS stock lists for less than 10% of its previous high.
Venture-capital investment in all business areas in 2002 is expected to be the worst in the last decade, projected to be in the $20-30B (U.S.) range, down from $55B in 2001 and $108B in 2000, the record year. In early 2000, seed and first rounds accounted for 60% of total investments; it is currently running at a 30% rate. A Price Waterhouse Cooper/Venture Economics/National Venture Capital Association Money Tree Survey in August 2002 shows that for every dollar invested in a new company, 5 to 7 times this amount was invested in existing portfolio companies. However, new deals in biotech received 1/3 and software received 1/4 of all new funding in their respective categories. This is not good news for startups in general and certainly not for M3 startups.
The year 2000 saw the creation of the first MEMS-specific venture capital/technology accelerator firm, Ardesta, which funded and helped launch a number of exciting MEMS-based startups. Ardesta has taken the strategy of licensing unique and marketable intellectual property from leading institutions, including Sandia National Laboratories, University of Michigan, and University of California Berkeley, as a part of its new venture strategy. Ardesta has made a number of significant contributions to accelerate companies including Sensicore, Ion Optics, and Tessera into the marketplace.
Creation of Wealth (Grade = C)
Down considerably from the grade of "A" in the 2001 report card, the creation of wealth grade has been significantly reduced to a "C." Many of the "millionaires on paper," as a result of optical-telecom buyouts, saw their fortunes sublimate over the last two years since their buyout was largely in stock and based on future performance. Acquisitions still continue with companies like General Electric acquiring M3 companies including TRW Novasensor in September 2002. The IPO of MEMSCAP S.A. (France) in 2001, the first in the history of M3, has not faired well as a result of the downturn in the high-technology market, especially in the worldwide stock markets.
Industry Roadmap (Grade A-)
Three organizations have developed an M3 roadmap: Nexus, issued in late 2000, the MEMS Industry Group, issued in late 2001, and MANCEF, to be issued in late 2002. All of these organizations have taken different approaches. The MANCEF roadmap is the most thorough, with 14 chapters addressing the significant factors in the commercialization of microsystems, including foundries, standards, EDA tools, market analysis, and reliability.
Conclusions/The Future
The year 2002 was expected to be a pivotal year in the worldwide high-technology community as well as in the M3 community. Expansion continues in many of the important areas including infrastructure, roadmaps, standards, and industry associations. This signals that a maturation process is in progress.
Regrettably, the general worldwide business climate is in a turbulent state as of the writing of this document in Q3 2002. Many M3 companies in the U.S. who had high hopes of emulating the early successes of Cronos, Xros, and Intellisense find themselves out of business or canceling development activities in optical-MEMS telecom systems. Among the most significant of these are OMM, Tellium, and Nanovation.
If M3 companies are to be successful during these trying times, they must do their homework in defining exactly what the market wants and what are their competitive and sustainable advantages. These are basic tenets of "Marketing 101."
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