MEMS and nano from a VC's perspective

Draper Fisher Jurvetson, a Menlo Park venture capital firm, has been actively investing in “small tech” startups and currently has approximately 20 MEMS and nanotech companies in their portfolio.  We recently spoke with Warren Packard, Managing Director at DFJ, who currently oversees a number of the firm's micro and nano portfolio companies.

MEMS Investor Journal:  Why does your firm like to invest in this space?

Warren Packard:  Our firm has always been focused on investing in companies with the potential to bring fundamental change to the marketplace.  Back in 2000, it was clear that the market was saturated with Internet start-ups and that companies with more defensible technology portfolios would be a desirable addition to our portfolio.  In addition, we realized that a host of new process technologies were beginning to mature that could be applied to lower the cost or speed the performance of computing. So, we began to explore micro and nano technologies as something that was fundamentally attractive and ready to be taken to market. 

MEMS Investor Journal:  While some VC firms have also been active with MEMS and nanotech investments, most are still not actively engaged.  Why do you think that is?

Warren Packard: Well, this is a fairly complex area to invest in with an incredible breadth of applications.  So, for investors it takes a great deal of time to get their arms around key drivers and trends.  We are also focused on very early stage investments so our strategy in this space has been to identify excellent teams with fundamentally new technologies and the persistence and drive to take these technologies to the marketplace. 

MEMS Investor Journal:  Let’s talk about your portfolio companies.  You recently led another $8 million round with Microfabrica – what progress has the company made over the past few years and what are the main milestones planned for the next 1-2 years?

Warren Packard:  This is actually a very good case study.  They started out with a small team and a new process for micro fabrication.  The first thing they did was to refine their process and canvas the market for the best possible applications for their process.   Then they identified the top candidate applications for their process and switched to a product-focused mode.  They are now in the midst of a two year product development cycle and it has been a very exciting time.  They are planning to scale up production soon and then expand their product portfolio to other applications.  The great thing about their process is that it can support many micro fabrication applications.

MEMS Investor Journal:  What do you see as the most likely exit strategy for them?

Warren Packard:  For all of our businesses, our goal is to build self-sustaining, stand alone operations.  So, ideally, we are looking for an IPO, but an acquisition is a possibility as well.

MEMS Investor Journal:  Siimpel, which focuses on integrated optical microsystems, is also in your portfolio.  How is that company doing and which specific applications are they targeting?  What have been the main challenges with bringing their products to market? 

Warren Packard:  They are doing quite well now.  Their initial product was focused on the telecommunications market.  Fortunately, the company was nimble and survived the telecom crash.  They are now focusing on fabricating low cost micro-scale imaging systems for phone handsets, laptops, PDAs, and micro-cameras.  They’re actively collaborating with the world’s leading consumer electronics, mobile communications, and digital imaging leaders.  Stay tuned for some significant announcements over the coming months.

MEMS Investor Journal:  Another portfolio company is Imago – they make an interesting 3D metrology and material characterization instrument.  Based on your experience with them, what do you think are the main challenges with commercializing instrumentation products? 

Warren Packard:  Yes, their case is actually quite different from Microfabrica and Siimpel.  Tom Kelly, the founder of the company, had been working on this technology for 20 years and specifically on the Imago product for 4 years before we invested.  So, the bottom line with them was that they were able to get to sales very quickly.  They started by selling into the metallurgy market and then were able to expand nicely into other verticals such as magnetic storage and semiconductor applications.

MEMS Investor Journal:  What is your exit strategy with them?

Warren Packard:  As will all of our businesses, we are working with them to build a strong stand-alone business.  I should also note that these days, with the new Sarbanes-Oxley requirements and regulations, it is significantly more difficult to take a company public than in the late 90s, for example.  These days, a company needs to have at least 4 successful quarters of profitability and about $50-100 million dollars in revenue.  But even with these increased requirements, we are bullish on our portfolio companies and are planning to have some exciting exits in this space 12-24 months from now.

MEMS Investor Journal:  How do you typically identify potential deals and portfolio companies?

Warren Packard:  Well, we use a variety of sources such as personal contacts, conferences, university connections.  Our top criteria are: 1) real customer need; the customer must absolutely need the product and it has been the "bulls eye" solution for them, 2) size of market; we typically look for market opportunities of $1 billion or more, 3) no firmly entrenched competitors; this is typically not a problem for most micro and nano applications because they are so new, 4) team and technology; we look for team of top-notch professionals who have the entrepreneurial spirit to make their vision a reality. 

MEMS Investor Journal:  For those of our readers who are looking for venture funding, are there specific areas of MEMS applications which you are now especially interested in?

Warren Packard:  We don't focus on any particular area within micro and nano.  Our process is to hear the initial pitch from companies and then dig in more deeply and do our homework about the industry and opportunity if we there is enough of a match and interest on our part.

*********
Warren Packard is a Managing Director at Draper Fisher Jurvetson. He currently serves on the Boards of 422 inc., Anagran, BinOptics, EoPlex, Imago Scientific Instruments, Media Lario, and Ooma. Mr. Packard also led the firm's investments in Feedburner, Hypernex, Microfabrica, Primet Precision Materials, Chilisoft (acq by SUNW), Digital Impact (NASDAQ: DIGI, then acq by ACXM), Direct Hit (acq by IACI/ASKJ), Enviz (acq by KEYN), Fogdog Sports (NASDAQ: FOGD, then acq by GSIC), NetMind (acq by NOK/PUMA), and Xfire (acq by VIA).

Prior to joining the firm, Mr. Packard co-founded Angara Database Systems, a main-memory relational database company, which was acquired by Personify. Prior to Angara, he was an Associate at Institutional Venture Partners, investing in early-stage technology companies. Before IVP, Mr. Packard was a Senior Principal Engineer in the New Business and Advanced Product Development Group at Baxter International. In this position, he led professionals from product development, marketing, and manufacturing in the design and manufacture of next-generation kidney dialysis machines. During his tenure at Baxter, Mr. Packard received a number of domestic and international patents for his engineering work - including designs of silicon-based micro-electromechanical systems. Mr. Packard is a Phi Beta Kappa graduate of Stanford University and holds a BS and MS in Mechanical Engineering: Smart Product Design. He received his MBA from the Stanford Graduate School of Business where he was an Arjay Miller Scholar.