Venture capital funding is a major source of strength in business, both for startup founders and the new companies they lead. It enables the creation of intellectual property, products and services, for which at the startup stage, it is nearly impossible to find adequate funding. Subsequent rounds of financing fuel growth and sustain performance.
Venture capitalists continue to infuse money into entrepreneurial ventures. Overall, VC investments in U.S. companies climbed eight percent from the prior year to more than $8 billion in the third quarter of 2007, according to the Quarterly Venture Capital Report released by Dow Jones VentureOne and Ernst & Young LLP.
While reports show surging investments across all technology industry segments, venture capitalists are more selective when it comes to startups looking for funding to fuel radio frequency identification (RFID) ventures. In fact, 2007 marks the second straight year VC investments declined. Between January and September 2007, VC investments slid to $180 million, compared with $220 million in 2006, and $286 million in 2005, according to PricewaterhouseCoopers' National Venture Capital Association MoneyTree Report.
Since January 2000, 58 RFID startups received $1.3 billion in venture capital funding, according to the report based on Thomson Financial data. Twenty three deals were completed from January through September this year, compared with 31 deals in 2006, and 31 deals in 2005.
Most deep-pocket investors agree RFID startups looking for money in 2008 to back ventures designing the same old supply chain applications could find fewer dollars then those charting new territories in piracy, privacy and pharmaceuticals. That's despite Best Buy, Metro, Target, Tesco, Wal-Mart and other retail stores reporting positive returns on technology investments from reducing in-store inventory while increasing sales.
Risky Business
Venture capitalists doling out funds say investments in some RFID companies are too risky. Following the overall industry average, two-thirds of venture-backed businesses fail to turn a profit. Many never amount to anything, and some founders will sell-off assets for pennies on the dollar, rather than shutdown the company and admit failure.
Failure isn't an option for Michael Kim, partner at venture capital firm Rustic Canyon Partners, who invested in InSync Software, a San Jose, Calif., company that designs sensor-driven applications, after spending two years analyzing the market. "We made the investment in February 2006 because they're not a pure play RFID company," he says. "There were too many investors interested in funding companies that went after startups wanting to serve Wal-Mart, Department of Defense, and pharmaceutical suppliers, so we looked for something else."
Venture Development Corp. (VDC) Analyst Louis Bianchin isn't surprised. He says VCs pulled back from investing in companies that focus on ultra high frequency (UHF) tags used in supply chain tracking applications. "VCs need to instruct CEOs to rethink their company's strategy," he says. "To broaden the market into other areas they must tell the CEOs, if your engineers design another UHF tag I won't give you a dime."
When Orfid expanded its IP portfolio in 2005 from organic RFID to comprise diodes, light emitting transistors and other electronic components, the Los Angeles-based company attracted funding from major companies. The Precision Dynamics spin-off, raised $3.5 million during the past three years. Aside from the chemical company BASF, Orfid gained funding from its parent company, Convergence Ventures, Tech Coast Angels, and discovery grants.
Printable RFID will quickly become a commodity, according to Jonathan Lasch, Orfid chairman, president and chief executive. "We think the bigger markets will be in display technology, such as dynamic digital signage," he says. "While there's an interest in printable RFID, there's much more interest in printable electronics."
Source: Venture Development Corp.
Change
The promise of change ranks high among the top incentives driving VCs to pour dollars into RFID companies. "It's very rare in life that you get to be present at the creation of a new industry because most investments represent incremental change, rather than a new birth," says Patrick Ennis at Arch Venture Partners, who led the funding for Impinj. "Often times a new market comes along where there's a need for something more capable, such as the barcode, which has been around for several decades. While barcodes transformed many industries, some believe the technology outlived its usefulness."
Not all companies making an impact in the RFID market are profitable. Alien Technology, which went through $250 million of investors' money, filed for an IPO in April 2006, but withdrew plans by August citing poor stock market conditions. Alien lost $63 million in 2005 on sales of $19 million, according to IPO Home Renaissance Capital. The company had planned to offer 9 million shares, with Bear Stearns leading the deal.
Whatever the cause for the loss, the Morgan Hill, Calif., company has made an impact in the RFID market. Alien, which set up a test center in Ohio, prompted a move by the Dayton, Ohio, city commissioner's office to build a business hub geared toward high-tech companies manufacturing RFID devices that track cartons of cereal, livestock and more. City officials signed a $1.4 million deal to attract small companies and create an incubator for automatic identification technologies.
