Estonia, a tiny country with 1.4 million people, defied the USSR, reestablished independence and joined NATO and the European Union, all in just 13 years. When some of those energies were redirected toward technology, Estonia became best known as the cocreator of the Skype Internet phone service, which was bought by eBay last year for $2.6 billion.

Now the members of the former Estonian Skype team have turned to venture capital investing. Through their Tallinn-based firm, Ambient Sound Investments (ASI), they are continuing to push Estonia into technology with a $2 million investment in Clifton Semiconductor, a startup that aims to supply gallium arsenide diodes as a replacement for silicon diodes in power semiconductors—a new market segment in the GaAs world.

"Clifton's advantage lies in the fact that we have learned to control the liquid phase epitaxy (LPE) GaAs crystal growth technology and are preparing for mass production," says CEO Lembit Dalberg.

Headquartered in the university city of Tartu, Clifton has a staff of 24. The company's roots can be traced back to Soviet times, when Estonia was the center for gallium arsenide-based R&D. Since then the principals have brought GaAs diodes out of the lab and into pilot production, says Olev Schults, the CFO and chairman of Cresco, an Estonian investment bank.

GaAs diodes have reliability and efficiency benefits over silicon that expand the performance capabilities of discrete power devices. Working with GaAs, however, is tricky and can involve a little black art in addition to science. Stephen Entwistle, vice president of Strategy Analytics, says that in some high-power applications, even a couple-percent improvement in efficiency can have a massive impact on the product's competitive advantage.

"Other companies haven't looked at GaAs diodes because the economics haven't quite been there to make it successful," he says. "The challenges come in trying to scale it up to higher-volume production."

Bruce Fournier, vice president of TriQuint Semiconductor, which runs a leading GaAs foundry, says GaAs parts are typically more expensive than silicon parts. Unless there is a compelling need for low-current consumption and high speed, GaAs-based diodes won't be attractive. "If a manufacturer can do it with silicon, it will, because it will be cheaper," Fournier says.

Entwistle says the existing market for discrete GaAs devices has been relatively small, at $50 million, with the same players supplying the same devices for years. But Clifton is essentially trying to create a new segment for GaAs parts, which could significantly increase the market size, depending on acceptance.

According to Clifton's management, a commercial product is six months away and mass production is expected in two years. Initial revenues are expected to come from low-volume sales of PIN diodes, which will be marketed by U.K.-based Semelab, a components supplier to the aerospace and military industries. The product range will then be extended. "How far the company can stretch that to the average domestic power supply will determine its success," Entwistle says.

Toivo Annus, chairman of ASI and former head of engineering at Skype, believes that GaAs diodes can potentially be used everywhere from aerospace to cars to home espresso machines. He adds that companies such as Clifton are sprinkled throughout the Baltic States and that ASI has also invested in some of these technology startups.

"The Baltic States will probably remain a tiny part of the global market, but this is a familiar market where we are very comfortable investing," Annus says.