Investors eye Memsic IPO, hot MEMS sector

Venture capitalists are watching the pending IPO of Memsic Inc. for signs whether the Andover, Mass.-based company is leading an industry that is a profitable ground for investors.

Memsic, which this fall registered for a $100 million IPO, develops MEMS (micro-electrical-mechanical systems) technology that is increasingly being used in consumer electronics, including laptop computers and cell phones. Memsic specializes in developing accelerometers, MEMS devices that sense and react to motion and which are used to control screen orientation in the iPhone and iPod Touch devices and enhance the Wii handheld controller.

The demand for MEMS sensors is also strong in the automotive industry, which uses MEMS to activate airbags, monitor tire pressure and to maintain stability control. Stability control, which measures a driver’s intended course vs. the car’s actual movement, could become mandatory in U.S. and European cars by the end of the decade, boosting the demand for the technology.

All this is good news for Memsic investors. Founded in 1999, the company has been profitable since 2004, according to its regulatory filing. The company raised about $33 million in venture from Celtic House Venture Partners (which owns a 16% share of the company before the IPO), The Still River Fund (about 15%), Ironside Capital Group, InveStar Capital Inc. and IDG Technology Venture Investment.

As of PE Week’s deadline last week, the company had not stated when it would begin trading its shares on the Nasdaq under its proposed ticker symbol MEMS. But observers are nontheless confident that the IPO will bode well for the industry.

“Memsic’s IPO is an indication of the maturity of the MEMS market, that we’re starting to see these companies go public,” says Jim Jones, managing director of Scale Venture Partners.

Foster City, Calif.-based Scale is not an investor in Memsic. But VCs have invested in about 30 MEMS-related companies annually since 2004 and are on pace to hit that level again this year, according to Thomson Financial (publisher of PE Week).

Scale made its first investment in a MEMS company nearly three years ago when it backed Innovative Micro Technology, a Santa Barbara, Calif.-based MEMS manufacturing plant. IMT raised $17 million from Scale, Miramar Venture Partners and Investor Growth Capital, according to Thomson Financial.

Since it invested in IMT, the mid-stage investment firm has added three more MEMS companies, all differentiated and with potential for high-volume sales, Jones says. They are:

• Discera Inc., which makes MEMS-based resonators that are smaller and cheaper than the quartz crystals traditionally used in semiconductors. The San Jose, Calif,-based company has raised more than $48 million from Scale, 3i, Partech International, Horizon Ventures and Qualcomm Ventures.

• Siimpel Corp., an Arcadia, Calif.-based company that uses MEMS technology in auto-focusing cell phone cameras and other devices, has raised more than $72 million in several rounds from Scale, Motorola Ventures, Draper Fisher Jurvetson, Zone Ventures and Portage Venture Partners, among others.

• Enpirion Inc., a Bridgewater, N.J.-based company that makes small inductors used in laptop computers and cell phones. Enpirion has raised about $44 million from Scale, Intel Capital, RRE Ventures and Canaan Partners, among others.

Interest in MEMS is being driven by the sector’s strong growth. The industry is expected to grow at a compound annual rate of 14.8%, climbing from $1.8 billion in 2006 to more than $4.2 billion in 2012, according to Prashanth Venkatesh, a senior analyst at market researcher Frost & Sullivan. Because MEMS sensors are critical for popular mobile phone features, such as text scrolling, gaming control and shock detection, Venkatesh says he expects the market for mobile phone sensors to grow by more than 30% within five years.

As the reliability of accelerometers and other MEMS technology continues to climb and their manufacturing costs drop, MEMS devices are expected to become a standard feature in the more than 1 billion cell phones sold worldwide annually, predicts Andrew Waitman, a managing partner at Celtic House, an Ottawa-based firm that invested in Memsic in 2001.

And thanks to motion-sensing features that are at the heart of the Wii’s appeal, MEMS technology is likely to be increasingly employed in other video games, observers predict.

Indeed, about the only thing that could derail the explosion of the MEMS sensor market would be a significant drop in consumer spending, which would affect automotive and consumer electronics sales, Venkatesh says.

Memsic, which reported in its regulatory filing that it expects sales to reach $20 million in 2007, appears to have resolved the biggest obstacle to profitability of MEMS: producing a high volume of accelerometers with a low failure rate and at a low cost. Memsic’s strategy is to manufacture its devices in China, where expenses are lower and the market for motion-sensing technology consumer electronics is booming. The potential to tap the Asian marketplace, particularly for cell phones, makes MEMS technology especially appealing to VC investors, says Waitman, an observer on Memsic’s board.

“MEMS is a relatively new technology, and the biggest challenge for companies using MEMS is the manufacturing,” Jones says. “Only in the past few years have the skills and expertise of manufacturers come up to volume.”