SOX looks interesting, perhaps interesting enough to take out 90 day high established in March. I was looking at AMD, but chart is too difficult to determine a good entry point. Anyone have a good looking semi play?
<April 16, 2003 4:59 p.m. EDT
SOMETHING VENTURED
Chip Firms Get Bigger Slice
Of Venture-Investment Pie
By BOB SECHLER
DOW JONES NEWSWIRES
AUSTIN, Texas -- You can't call semiconductor venture investing hot. But it's a lot less cold than virtually every other sector.
The chip sector remains mired in a protracted sales slump and hasn't produced an initial public offering in nearly two years. Yet venture capitalists have been demonstrating increased optimism in it nonetheless, at least on a relative basis. Venture investing has fallen precipitously overall.
The percentage of venture capital earmarked for semiconductor start-ups has doubled, reaching 5.6% of such investments last year after accounting for a mere 2.8% from 1995 through 2000.
The trend can be attributed largely to underlying confidence in the chip sector as venture investors regroup in the aftermath of the dot-com crash. The semiconductor industry is undeniably cyclical, but it's also viewed as a huge and historically profitable cornerstone of technological innovation.
In addition, the proliferation of products using increasing numbers of semiconductors -- everything from automobiles to hand-held devices -- has simply created more opportunities in recent years for entrepreneurs with specialized chip designs, observers say.
"It's a great time to start a [chip] company right now," said Mark Stevens, a partner at Sequoia Capital Partners, one of the most active chip investors among venture-capital firms. "In the later part of the decade, we will see lots of [chip] companies that are doing nicely and are ready to go public, and they will have gotten their start in 2001, 2002 and 2003."
To be sure, the overall dollar amount of venture funding for chip start-ups has fallen substantially since the height of the technology investment binge in 2000 -- but not as steeply as venture investment overall.
Semiconductor firms received $1.18 billion in venture investment last year, according to the statistics from PricewaterhouseCoopers, off about 65% from $3.37 billion in 2000. Overall venture investing, meanwhile, has plummeted about 80% in that time, to $21.18 billion last year from $106.56 billion in 2000.
Raman Chitkara, of PricewaterhouseCoopers, said the numbers indicate the chip sector has managed to retain some "traction" among investors despite the fallout of the crash, a trend he doesn't find surprising. "What happened after the dot-com boom is [venture] investors were clearly focused on getting back to fundamentals and back to industries which have the potential for profitability," Mr. Chitkara said.
"That focus ... has made [the chip industry] more attractive to investors relative to some others," he said. "It's cyclical, but it has a demonstrated history of profitability over a period of time. The semiconductor industry as a whole has a very bright future, and no one questions that."
The view is in stark contrast to that cast on the likes of the Internet sector, which fueled much of the excitement during the boom but lacked any track record to calm the nerves of jittery investors in its aftermath, Mr. Chitkara said.
Still, the chip industry is far from being anointed the new "hot" space for venture investment. That status is more appropriately attached to the biotech and medical device sectors.
Combined, biotech and medical device startups drew about 22% of overall venture capital last year, after garnering 8.8% from 1995 to 2000. Total VC investment in biotech and medical devices has slumped only about 32% from 2000 levels, coming in at a combined $4.67 billion last year. But observers say the chip sector's more moderate upswing as a percentage of overall venture investing remains significant nonetheless.
Steve Cullen, a chip industry analyst with market research firm In-Stat/MDR, said the rise of the "fabless" semiconductor business model -- meaning design-only firms that use contract manufacturers for production -- has substantially lowered the cost of creating semiconductor companies.
Fabless companies have been around since the late 1980s, but the trend has accelerated in recent years. "Because of that, you have a very large number of very small companies, most of which are addressing a particular niche of the market," Mr. Cullen said. "It's relatively cheap for them to get started because they don't have to invest in a billion dollar" manufacturing plant.
Meanwhile, the market for chips has widened considerably as semiconductors have found their way into increasing numbers of product categories, even as the traditional top-end user -- the computer industry -- has been in a slump. Most observers say the trend will continue, although computers are expected to remain the largest market.
"It's a much broader, more complicated and dynamic industry today than it was five years ago," said Dave Furneaux, a managing general partner of Kodiak Venture Partners. "A lot of new semiconductor applications have emerged in the last five years," generating niche markets for new players.
In addition, Mr. Furneaux said the chip industry's rising percentage of overall VC investment is related to optimism that merger activity in the sector will pick up soon, providing a viable exit strategy for venture capitalists despite a dormant IPO market. "We're expecting to see some good M&A activity in the next year or two" regardless of the IPO market, Mr. Furneaux said.
The chip sector is traditionally on the leading edge of an economic rebound, he said, and many established semiconductor companies will look to add to their product lines -- and thus acquire startups -- at the initial signs of a recovery.
Overall, however, Mr. Furneaux and others expressed little surprise that chip investing has doubled as a percentage of total venture investing -- or simply not fallen as steeply as venture investing on the whole -- in the aftermath of the crash. "They don't call it 'Silicon Valley' for nothing," Sequoia Capital's Stevens said. "Semiconductors are the foundation of the information-technology industry. There will always be a core level of investing in semiconductors by the VC community."> |
