Chip deals not quite cashed out

Semiconductors are still in vogue with a handful of venture capitalists, despite the financial downturn and increasing investor interest in cleantech.

Just last week, two semiconductor companies combined to raise $33 million in funding.

R2 Semiconductor added $11 million to a Series A it started raising late last year and Unity Semiconductor raised $22 million in a Series C round of funding.

The fundings come as venture capitalists have decreased their investments in semiconductor startups during the first quarter. Nationwide, VC firm invested $172.5 million in 23 startups in Q1, a drop from the $606.7 million they invested in 53 companies during the same period last year, according to the MoneyTree report from PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters (publisher of PE Week).

R2 Semiconductor, a Sunnyvale, Calif.-based startup in stealth mode, has now raised $13 million from investors, according to a regulatory filing. Sigma Partners led the latest funding with Morganthaler Ventures and Sequoia Capital also investing, according to Fahri Diner, managing director of Sigma Partners. Robert Schwartz, managing director of Third Point Ventures (the venture arm of New York-based Third Point Management) and former National Semiconductor CTO Richard Sanquini are listed as members of the company board.

The company is one of a handful of new deals to be done lately in the semiconductor industry, says Drew Lanza, a partner at Morganthaler. “I doubt if you could find more than two or three Series A deals lately,” he says.

Lanza attributes the decrease in early stage semiconductor funding to the increased cost of technology and funding.

“At one time, VCs could expect to invest $10 million to $20 million and get a $100 million exit,” he says. “Now it takes $40 million or more in funding and the exit is about the same. The industry is just not that appealing to investors these days.”

There are still interesting niches though, where a little bit of money can go a long way toward solving problems for devices, he says. Lanza points to mixed-signal radio frequency semiconductors as one interesting niche. Lanza describes R2 Semiconductor as doing mixed-signal radio frequency, but he declined to disclose details about the stealth company. The startup hasn’t issued any public information about what it is working on. The company did not immediately respond to a request for comment.

Two executives listed on R2 Semiconductor’s regulatory filing previously worked together. David Fisher and Andrew Hartland worked at Radia Communications as CEO and CFO, respectively. Texas Instruments bought Sunnyvale, Calif.-based Radia for an undisclosed amount in 2003.

Radia had been working on radio-frequency semiconductors for 802.11 wireless networking devices. The company raised $8 million in two rounds of funding from Third Point Management, InnoCal Venture Capital, Firsthand Funds, Pac-Link Ventures and Greenlight Capital Inc., according to financial documents.

Meanwhile, Sunnyvale, Calif.-based Unity Semiconductor raised $22 million in its Series C last week from August Capital, Lightspeed Venture Partners, Morgenthaler Ventures and a large, undisclosed maker of digital storage.

Unity, which has now raised $75 million in total funding, develops technology that it hopes will replace flash memory. The company says its so-called “CMOx” technology will have four times the storage density of existing flash products and work as much as 10 times faster. Unity has received 60 patents on its technology, the company says.

Unity says it will take two years before it gets up to production volume on its first product, a 64-gigabit storage device. The company estimates the market for flash memory will reach $25 billion by 2013.

A market that size should attract plenty of attention from VCs, but few seem to be as interested in semiconductor investments as might have five years ago.

“As an industry, we’ve sort of cut in half our interest in semiconductors,” says Morgenthaler’s Lanza.

But just because VCs aren’t investing as much doesn’t mean the demand for new products has dried up. “People are still buying chips,” says Lanza.