NEA Leads $50M Investment in WOFE

Spreadtrum Communications, a trans-Pacific, fabless semiconductor company announced one of the years’ biggest semiconductor VC investments last week in a financing led by New Enterprise Associates (NEA).

NEA and existing investors Fortunetech Investment Fund, Pacific Venture Group, Vertex, Legend Capital and HuaHong International invested almost $50 million in Spreadtrum.

The company – which operates at locations in Sunnyvale, Calif., and Shanghai, China – is typical of the new breed of trans-Pacific companies. It maintains engineering design teams in the United States, but the bulk of its employees are in mainland China, and have their legal domiciles in the Cayman Islands. Spreadtrum for example has 30 employees in Sunnyvale and more than 160 in Shanghai. This structure makes Spreadtrum a wholly owned foreign entity (WOFE).

Venture firms have preferred investing in WOFEs (pronounced “woo-fees”) over investing in joint ventures during the last few years for a host of reasons.

One reason is that it has beennearly impossible to invest directly in Chinese startups. Also, the WOFE structure allows investors to take such a company public on a U.S. stock exchange.

NEA’s participation was led by Scott Sandell, the GP who also oversaw NEA’s recent investment into BCD Semiconductor, a Shanghai-based foundry for analog chips. NEA’s increased interest in Chinese portfolio companies follows on the heels of its recent successful exit and IPO of Semiconductor Manufacturing International Corp. (SEMI). SEMI, by the way, was setup as a WOFE by NEA and its other backers.

At present, Spreadtrum designs GSM/GPRS baseband chips for cell phones, which the company hopes to sell to China’s cell phone makers.

Laure Wang a general partner at Pacific Venture Partners in Sunnyvale, Calif., which is also a trans-Pacific venture firm based in Taipei, was one of Spreadtrum’s initial investors.

“China’s domestic cell phone subscriber base passed 300 million in the first quarter of the year, making it the largest market in the world, despite having only 25 percent penetration, compared to around 50 percent in the United States,” Wang says.