Finding funds

During one of the worst money-raising environments in years, a few electronics companies recently secured substantial second-round or later-stage venture financing. That they managed this is interesting enough, but what's more useful is how they did it.

Top executives from three companies below, which each raised $15 million or more, offer their insights on raising cash during tight-fisted times. They are corroborated by Steve Bird, general partner at Focus Ventures Inc., Palo Alto, CA, a VC firm that invests only in expansion stage companies—those that already have three or more funding rounds. (Focus Ventures did not invest in the three start-ups whose executives were interviewed.)

"Most VC-backed companies take five or six financing rounds to get from start-up to a liquidity event," Bird notes. At any stage, he says, VCs look for strong management, a large or growing market and proprietary or competitive technology with some barrier to entry.

For later stage companies, Focus Ventures looks for three additional criteria: momentum with customers and revenue; potential to be first, second or third in its market; and the pedigree of the original funding VC firm. "There are only two or three dozen really good early stage VC firms we like to work with," says Bird, declining to name them.

At MediaQ Inc., Santa Clara, CA, quality repeat customers, many of them reference accounts, were essential to raising a $15-million Series D in late July, says CEO Elie Antoun. El Dorado Ventures Inc., Lawrenceville, NJ, led the round. MediaQ develops chips and software for color screens for cell phones and other handheld devices. "We are pushing the technology envelope in an evolutionary market," says Antoun.

MediaQ, which was founded in 1997 and has raised a total of $55 million, made a bet two years ago that cell phone users, especially in Asia, would start to convert to color screens even if overall sales of the devices were flat or down. The company began product development in early 2000 and was first to market. "We made the right bet," says Antoun. "There was some luck involved, but also hard work and a clear vision."

MediaQ is selling four products to nearly 100 customers, including Sony, Toshiba, NEC and about 10 other top manufacturers. Revenue has grown from about $2 million per quarter a year ago to around $7 million a quarter recently, says Antoun. He hopes to be profitable in another three to four quarters. "We clearly expect an IPO at some point," says Antoun. "The most important gating factor to [an IPO] is profitability."

A new management team and a new vision jump-started stagnant Chip Express Corp., Santa Clara, resulting in a new round of financing in June, says Doug Bailey, vice president of marketing. It secured $16 million, bringing its total to $44 million. Wasserstein Ventures, an affiliate of the New York-based merchant banking firm Wasserstein & Co. LP, led the recent round.

Founded in 1989, Chip Express dawdled for years providing a service that used lasers to make quick-turn custom chips. The model could not scale to any size or profitability, says Bailey. The new model: Continue the quick-turn prototypes with a less expensive process and offer volume production of those chips at a lower cost than customers could achieve themselves.

Chip Express hired a new CEO, Steve McMinn, in late 1999. "He changed the entire management team except the CFO," says Bailey, who joined in April 2001. The management team turned over not because different or better skills were needed, but because a new mindset was required. "The previous executives had some difficulty getting with the new program," he says.

Bailey believes VCs have lost confidence in their ability to pick winners, which puts the onus on start-ups to prove they have a workable model. "We put together a business case that was backed up with existing revenue, customers and proof that the model would work," he says.

As it transitioned to the new model, Chip Express kept 120 customers, many of whom said they would use the volume production service Chip Express planned to offer, Bailey says. The company is bringing in about $6 million in revenue per quarter.

Silicon Optix Inc., San Jose, CA, develops a digital image-processing chip used in such advanced optical applications as rear projection big-screen television. The two-year-old start-up had the advantage of proven intellectual property (IP), existing customers and revenue when it spun out from Genesis Microchip Inc., San Jose, in July 2000, says CEO and Founder Paul Russo. "We had some revenue on day one and the new chip started shipping in nine months," says Russo, who was also founder and one-time CEO at Genesis.

Silicon Optix recently closed a second round at $17 million, which included $7 million converted from bridge loans from earlier investors. The second round was co-led by Canaan Partners, Menlo Park, CA, and Polaris Venture Partners, Boston. The company had earlier raised $8 million, including a $2 million seed investment from Genesis. However, the company was able to buy out Genesis after an earlier fund raising round.

Much of the current chip that Silicon Optix sells, including the core IP, was developed during a five- to six-year period at Genesis. Silicon Optix also benefited from taking over end-of-life manufacturing and sales of three Genesis chips, which the parent company was no longer interested in selling.

About half of Silicon Optix's $4 million in revenue this year comes from the older chips, says Russo. More importantly, he says, picking up those lines of business gave the company 40 regular customers and a built-in sales channel for its new chip. "It would have been hard to establish a worldwide sales channel without a chip to sell."

Silicon Optix's technology has the potential to reduce the cost of various commercial and military imaging applications, says Russo, because it requires less expensive lenses than existing applications. Using less costly lenses that capture only a portion of an image, the Silicon Optix chip mathematically fills out the rest of the picture in high resolution. "We move the lens functionality into the chip," says Russo.

A number of potential investors didn't want to touch Silicon Optix because the technology was too leading edge. But that was exactly why the investors who came in on the recent round chose to invest, Russo says.

"We think what we're doing here will result in a lot of new ideas for the future," he says. "But we still have a lot of missionary work to do. Many customers don't realize what you can do for them when you first meet them."

VC INVESTMENTS BY STAGE OF DEVELOPMENTfirst half of 2001 vs. first half of 2002, in millions of $