VC Funding For Chip Startups Struggles

LONDON — The level of venture capital funding for electronics and semiconductor companies is set to improve in the second half of the year after a slow first half. But the funding will likely struggle to beat the investment total in 2005 overall as it did in 2004, according to research by EE Times.

VC activity is monitored by EE Times in its venture capital counter (the VCC) and after a low level of activity in Q1 a record level of investment in the second quarter could make up the ground lost to 2004. As a result EE Times is predicting that for the 2005 VCC will achieve between a 15 percent drop in investment and 5 percent growth compared with 2004.

At the mid-year point investment stood at $1101.2 million in 2005 raised across 92 deals compared with $1285.45 million raised across 102 deals in the same period in 2004.

The signs are that although the deal flow and value per deal was up in the second quarter the poor performance of the first quarter will drag the year down. A better second half is expected but with a seasonally quiet third quarter including August vacation time and the fourth quarter including the holiday month of December there is less chance for 2005 to make an impression.

There are signs that California and the U.S. is starting to attract more VC funds despite a lack of IPOs and successful exits. If Europe can start record some larger funding amounts or increased deal-flow there is a chance for VCC to show some growth in 2005. The anecdotal evidence is that VCs in Europe are backed up with business plans but lack experienced partners to put on to startups boards of directors to look after their investments. There has also been some discussion that with some funds have large amounts of money on hand there is a necessity to lend out larger sums to later stage companies that have revenue and are close to exit.

This is producing complaints from some startups that the VCs are getting greedy and are not prepared to take a risk or are asking for too stakes that are unreasonably large in return for the cash offered — an argument that has circulated many times over the years.

If venture capital money is tending towards the private equity end of the market, some are arguing that business angels could and, in cases, are stepping in to pick up the very early-stage investment opportunities. These may be under-reported in the VCC but ultimately a collection of business angels often provides the seeds of the next small VC fund which is prepared to invest money a million dollars at a time.

One way to unlock there European startup opportunity and help the VCC record some growth is for U.S. investors to come to Europe. U.S. funds have come to Europe but have tended to return to the U.S. after one or two deals.

Again, the anecdotal evidence is that long-distance management of investments has not worked well. It also provides one reason why there is a tendency for startups from around the globe to arrange themselves with their headquarters in Silicon Valley. They do this because its where the VC money is and its easier to hold board meetings close to the money regardless of where the technology and product development is done or where there is a business opportunity.

The European startup activity is predominantly in the U.K. and Israel, with the Nordic countries following close behind.