Absolutely ‘Fabless’

Companies that outsource their chip manufacturing have gotten more than their fair share of respect in the past six months, according to one industry group.

A report released this week by the Fabless Semiconductor Association (FSA) shows fabless plants experienced quarter-over-quarter growth in VC funding for the second straight quarter, growing 23 percent in 1Q 2003 to $423.4 million from the $344 million raised in 4Q 2002.

According to the Dallas-based group’s “Fabless Fundings Report,” the last time there were two consecutive quarters of growth in funding was 3Q 2000 when the dollar amount raised grew to $927 million from $767.7 million in 2Q 2000, and up from $154.1 in 1Q 2000.

Currently, nearly every semiconductor company uses some type of fabless approach. The FSA’s vision is that by 2010 half of all integrated circuit revenue will come from fabless/outsourced operations.

“The venture capital community is continuing to invest in the fabless space, albeit at lower levels than the past three years,” said Mark Stevens, a partner at Sequoia Capital and a member of the FSA VC Advisory Board. “Companies that are developing and marketing devices for existing standards and have high-volume prospects are favored in the current climate.”

A fabless design production facility does not manufacture integrated circuits onsite but outsource tasks to suppliers. Such as the case of Sun Microsystems , which has Texas Instruments build its Ultra SPARC 64-bit processors. The practice is extremely beneficial for smaller chip companies, which can’t afford their own wafer fabrication facilities. Low-power chipmaker Transmeta , for example, partners with TSMC (Taiwan Semiconductor Manufacturing Company) to make its Crusoe chips. Companies ranging from Intel , AMD to TRINAMIC Microchips and Centillium Communications use fabless plants to make their processors.

According to the report, 35 fabless companies raised $423.4 million in the quarter, according to FSA. That is the largest total dollar amount raised since 2Q 2002 when fabless companies closed $429.5 million in funding. In addition, the 35 fundings in 1Q 2003 represented the most deals closed since 4Q 2001 when 37 companies received funding.

The deals began slowly in 2003, with 10 companies raising $59.2 million in January. Investors more than tripled their contributions to fabless companies in February, with nine companies raising $182 million and maintained that pace through March, as 16 fabless companies closed $182.2 million. This represented 43 percent of all funding raised in the quarter, and was the most raised in one month since June 2002 when 13 companies raised $190 million.

Investors also demonstrated a renewed interest in first-round funding during the quarter. In 1Q 2003, 29 percent of all funding went to companies seeking their first round, compared to 21 percent in 2002 and 33 percent in 2001. However, the average amount raised in first-round deals continued to drop, reaching $5.1 million, compared to an average of $8.3 million in 2002, $8.8 million in 2001 and $15.8 million in 2000.

FSA says it will continue to establish the fabless business model as the dominant method for semiconductor companies to conduct their operations.

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