Down, not out

If venture capitalist investments say anything about what Orange County's technology world might look like in a few years, then signs for chip and photonics companies could be even more prominent than they are today.

Where money flowed into Internet ventures in the past few years, funding has shifted to companies that make the pieces of data networks rather than those that do business over the Internet.

"We're seeing better deals and more deals in infrastructure and enabling technologies," said Randy Lunn of the Irvine office of Palomar Ventures. "That's more investments in semiconductor chip areas, wireless and enabling business software."

Semiconductors always have held allure for venture capitalists. But these days, the fallout of dot coms and come software companies has given chip makers a new sheen-despite the current poor fortunes of big chip makers.

As local venture capitalists tell it, the failure of Internet businesses points out the obvious: there just aren't enough pipes to make serious money selling over the Internet. Investments need to go to the companies that make the pipes-or speed the flow of data over them.

In the past month or so, Irvine chip designers 3DSP Corp. and TransDimension Inc., as well as VSK Photonics Inc., an Irvine components maker for optical networks, closed new rounds of funding totaling nearly $35 million. A handful of smaller photonics companies and chip designers also have received money in recent weeks. "More companies receiving money today are very heavy in intellectual capital," said Richard Shuttleworth, senior vice president at the Irvine office of Silicon Valley Bank.

Good tech ideas are likely to get funding, venture capitalists say. But entrepreneurs still have to deal with tighter purse strings in the wake of the tech downturn on Wall Street. The number of venture capital investments in Orange County companies has steadily declined from the record-setting second quarter last year, when 37 companies received $418 million in early- or later-stage financing, according to Thomson Financial Securities Data.

In all of last year, venture capitalists sunk $1.5 billion in OC companies. And while venture capitalists still are laying down cash locally, some of the money is going to ventures outside of networking technology. In the fourth quarter, OC medical device makers, biotechnology companies and healthcare services providers received $69 million in venture funding.

One byproduct of the new funding climate: the quality of entrepreneurs is rising, according to Fred Selby, president of the OC chapter of the Tech Coast Angels, a group of private investors.

"You can't be a freshly minted MBA anymore and get funding," he said.

Despite an industry slump, venture capitalists expect to see more chip startups and investments. OC's big chip makers create a springboard for engineers to set out on their own to design chips.

"At companies where engineers have ideas they can't pursue and have ideas that make sense, it makes sense to spin out," Lunn said.

The result: companies such as 3DSP, Y Media Corp. and Valence Semiconductor Inc. The startups, all in Irvine, count executives and engineers who've worked for Newport Beach-based Conexant Systems Inc. and Silicon Systems Inc., a Tustin chip maker now part of Texas Instruments Inc., among others.

Overall, local venture capitalists say OC has become a more appealing place for upstart technology companies.

"One of my investments relocated here from Arizona," Selby said. "I've seen others from Chicago and other places. We're starting to get some good folks here."