Don't fret, optical startups -- somebody out there still loves you!

Granted, VCs haven't abandoned optical entirely (see VCs Still See the Light ), and the fund in question is interested in a variety of early-stage startups. But the big name of Applied Materials Inc. (Nasdaq: AMAT) should resonate with anyone wrestling with the manufacturing issues inherent in optics.

Applied Materials is a multibillion-dollar firm that supplies manufacturing equipment to the likes of Intel Corp. (Nasdaq: INTC). Now, through its investment arm, it's trying its hand at funding optical startups. The firm created Applied Materials Ventures in August 2001, ponying up an undisclosed amount of cash as the sole limited partner, and now the hunt is on for startups -- preferably chip or component companies in data communications or telecommunications.

Applied Ventures is being run as an independent company. "None of us come from Applied," partner Julien Nguyen says. "Our backgrounds are on the entrepreneurial side."

In the late 90s, Nguyen founded companies such as Ezlogin and Novita -- focused on the then-new area of Internet software tools -- and came out with a track record of one IPO and two mergers. Most recently, he's been a VC at Global Catalyst Partners. Fahri Diner, a partner who joined up just recently (see Qtera Founder Joins VC Firm), is the former CEO of Qtera, which was acquired by Nortel in 2000. Afterwards, he did a stint as a partner with Mayfield.

That Applied Materials is getting into this game isn't so unusual. Other large companies such as Intel have created venture-capital arms, hoping to keep the technology engine rolling. Intel Capital has sprinkled money into areas as diverse as handheld computing, optical components, e-commerce software, and micro-electro-mechanical systems (MEMS), with the ultimate goal of fueling the applications that will drive the need for faster/bigger/better Pentiums.

Applied Ventures is cast in the same mold, in this case scouting out the technologies that push the limits of semiconductor manufacturing technology. And that's why the fund is so obsessed with communications startups, which "tend to use the most advanced components," according to Nguyen.

Communications chips push multiple extremes. Some of them represent the largest chips passing through foundries, while others strive to be impossibly small and low-powered. The highest-speed data communications devices use advanced manufacturing processes and exotic materials such as indium phosphide (InP).

The idea is not to drum up business for Applied Materials directly, but to find technologies that will challenge the industry's manufacturers. "We invest in the customers of Applied's customers. Applied's customers are the [semiconductor] foundries, and we invest in the companies that use the foundries," Nguyen says.

Applied Ventures also wants to catch them early. Its first three investments have been optical firms Infinera Inc. and Glimmerglass Networks, and wireless LAN player Instant 802 Networks Inc. A fourth investment, in a radio-frequency chip company, is being finalized.

Early-round funding isn't dead, but it's certainly lost some luster. In 1999, 54 percent of all deals were seed- or first-round, and they made up 36 percent of the VC dollars invested that year, according to research firm VentureOne. For the first three quarters of 2002, seed- and first-round deals were only 32 percent of the total, representing around 20 percent of the money invested.

As for investing in optical, Applied Ventures thinks its timing is appropriate, precisely because that area has lost some popularity. "When times are tough, people tend to go back to their roots," says Diner. "People doing optical deals are going to be people who have been doing optical for a long time."

Applied Ventures' mission has no explicit emphasis on optical, but there's an unmistakable connection. Even in the downturn, photonics firms are looking for ways to automate manufacturing and to integrate photonics with electronics. It's no stretch to think that Applied Materials, the king of semiconductor manufacturing equipment, might want to keep an eye on developments in this area. "To the extent that manufacturing equipment is involved, obviously Applied has an interest in that space," Diner says.

And for worthy startups, Nguyen and Diner can provide an "in" with AMAT. Both men deal with AMAT's office of the president (the three-man executive post under CEO James Morgan and president Dan Maydan) and have access to the general managers of its various divisions.

Aside from optical, Applied Ventures is delving into popular VC hunting grounds such as 10-Gbit/s Ethernet and next-generation access technologies. Software is fair game for the firm, too -- Diner is interested in the idea of lowering carriers' operating expenses through software innovations, but his interest is still at a vague level. "We're still working on [finding] the right business models to make money in that space," he says.

Nguyen is hoping that in the well-worn disciplines of logic and memory design, some new ideas are ready to bloom. "That happens all the time, even in a mature industry like semiconductors."

He's also willing to give nanotechnology its shot. "In spite of all the hype, it might actually work," he quips.

— Craig Matsumoto, Senior Editor, Light Reading
www.lightreading.com