Tech Roundup: Microchip Firms Make Great Exits

A look at what’s happening in Israeli high-tech this week.

DesignArt in talks

Over the past two years, microchip makers have produced the biggest exits for Israeli high-tech. Companies such as Wintegra, CopperGate, BroadLight, Provigent and Anobit each were sold for hundreds of millions of dollars to multinationals like PMC-Sierra, Broadcom and Apple. It now appears that DesignArt, which develops system-on-chip platforms and trial-ready software solutions for 3G and 4G smartphones, will be joining the list.

DesignArt, established in 2006, is in advanced talks for acquisition by Qualcomm. According to statistics provided by IVC-Online, DesignArt employs 50 people and registered $6 million sales in 2011. IVC expects the Tel Aviv-based firm to double its sales, to $12 million, in the current year.

The potential buyer is Qualcomm, a California-headquartered leader in 3G and wireless-chip technology currently valued at about $95 billion. Qualcomm, which has a development center in Haifa, in 2010 acquired iSkoot, an Israeli start-up. iSkoot developed a platform that allowed cellular providers to offer VoIP, e-mail and instant messaging services to their end-users. It paid between $60 million and $80 million for the company, according to venture capital sources.

DensBits has flashy prospects

DensBits has attracted worldwide attention in recent months. The Haifa-based flash-memory start-up, which competes with Anobit, was one of the Israeli companies high-ranking Apple officials met with earlier this year before the computer giant's $390 million acquisition of Anobit. This week DensBits made news of its own, announcing a strategic agreement with SeaGate Technology, the hard-disk maker. Controller programs by DensBits will be integrated into Seagate’s flash drives, the company said.

Israeli flash-drive companies, of which DensBits is one, have also been in the spotlight. Last week Kaminario, a maker of enterprise storage solutions based in Yoqneam near Haifa and Newton, Massachusetts, announced the completion of its $25 million fourth fund-raising round. A month ago XtremIO, which develops flash-based data-storage solutions, was acquired by Massachusetts-based EMC for $450 million – one of the biggest Israeli exits in the last few years.

According to a recent Thompson-Reuters analysis, the XtremIO sale was among the last quarter's largest merger-and-acquisitions high-tech deals worldwide. Leading the list is the billion-dollar acquisition of social-networking company Instagram by Facebook. In second place, also in the world of social networking, is the acquisition by Microsoft of Yammer for $1.2 billion.

IVC: Chip design in decline

Although most of the recent deals involving giant high-tech corporations focus on Israel’s microchip and flash sector, the number of pure chip-design firms is declining. According to IVC-Online, only eight microchip companies were established in Israel in 2010-2011, compared to 24 in 2004 and 25 in 2005, the peak years of the previous decade.

Attempts by venture-capital firms to stimulate the sector appear to be fruitless as well.

About a year ago, four VC funds – Magma, Carmel, Gemini and Genesis – formed Solid, a joint fund designed to encourage the establishment of new microchip firms in Israel. The fund offers entrepreneurs in the field up to $75,000 in pre-seed grants at the business plan-formation stage to help them survive the first year.

Eyal Waldman of Mellanox, Boaz Eitan of Saifun, Dov Moran of M-Systems (and Modu) and Technion Prof. Israel Cidon are among the prominent businessmen advising young entrepreneurs through the fund.

“If entrepreneurs such as the ones who founded PrimeSense were to approach a venture-capital fund today with an idea for controlling computer games with body movements, they’d be tossed out the window,” said Inon Beracha, CEO of the company which developed the microchips that lie at the heart of Microsoft’s Kinect system. “It’s sad news. It means that the creation of new ideas is going to stop because funding sources have dried up.

“Today, there’s less money for investment. That leads to a transfer of investments from hardware to software,” he says. “In the venture-capital world, there’s an accepted assumption that a company that does fabless planning requires an investment of $50 million before it starts turning a profit. Most venture-capital funds will not take a risk like that. And the amount of investment that’s required is not the only thing that puts them off. Chip companies take a lot more time to become profitable. Investing in chips pushes back the exit.”

Despite these conditions, promising chip companies have sprouted in Israel over the past several years, such as Avigdor Willenz’s Annapurna Labs. Willenz was the founder of Galileo, which was acquired at the end of the 1990s for $2.7 billion. “Playing with chip development is a tough technological game and a long haul. But there will be more companies like that in Israel, and more investments in them,” says Giza Ventures partner Ori Kirshner. “It’s still one of the strongest sectors in Israeli high-tech, where innovation is the name of the game.”