StarGen Cashes in Chips for $20M –

MARLBOROUGH, Mass. – Technology users are no longer satisfied with listening to a voice without a picture, or seeing a picture without a voice, or receiving data without either. Let’s face it – they want it delivered all at once, and they want it delivered fast.

The desire for increased speed and power has surpassed the capabilities of semiconductor systems and the race is on to improve digital convergence. Semiconductor company StarGen Inc. is addressing the demand for more capable components, fueled by producers of communications boxes, by designing chips that enable larger volumes of traffic – such as phone calls and Internet connections – to move more quickly than existing systems will allow.

The key to the company’s success: Developing products that can be used within the existing infrastructure, said Tracy Richardson, co-founder and president of the company.

StarGen is creating products that will expand the capabilities of the standard PCI, Compact PCI and H.110 systems, allowing vendors of carrier and enterprise communications equipment to incorporate StarGen chips into their existing infrastructure. While there are companies developing more powerful systems, StarGen does not consider itself to have direct competitors because none of those companies are designing switched serial interconnects that can work within existing infrastructures, Richardson said.

Founded in February 1999, StarGen received its first round of financing in July 1999. St. Paul Venture Capital led the $6 million round, and co-investors included Bessemer Venture Partners, Commonwealth Capital Ventures and Boston University Community Technology Fund. The firm used the capital for initial development, which included hiring staff and acquiring software and hardware, Richardson said.

Cleveland-based Morgenthaler Ventures joined the group of existing investors to lead the company’s $20 million second round of financing. All of the original investors joined the second round, which closed on July 31. StarGen wanted Morgenthaler to lead the deal because the firm is familiar with the semiconductor space and for the firm’s overall reputation, Richardson said.

StarGen will use the latest round of capital for growth and product development, as well as increasing the force of its marketing and sales teams, Richardson said. The company, now 25 people-strong, is preparing to begin selling its products by the end of the year, he said, targeting clients such as Nortel Networks Corp., Lucent Technologies Inc. and Ericsson SpA.

The appetite for capacity and speed has increased, but the standard has not changed, and the standard is no longer good enough, said Paul Levine, a venture partner at Morgenthaler. The firm was attracted to StarGen, in part, because it is leveraging the existing off-the-shelf standards by building a system that customers can migrate into without having to change the entire set up at once, he said. While there are companies that are capable of solving this problem by building completely new systems, finding a way to deal with real-world constraints is the challenge, Levine said. StarGen is solving the problem in a ubiquitous and general-purpose way, he said.

Morgenthaler would back StarGen again if the opportunity arose, Levine said, touting StarGen’s executive team as pedigree. Morgenthaler is interested in infrastructure companies because they play in the fabric of the systems people are building, particularly in telecommunications, he said, adding that the firm is willing to invest up to half of the vehicle in telecommunications and fiber optic companies.

StarGen is in the process of securing patents for its first two chips, called the Star and the Bridge. The two components can be configured in a variety of ways to accommodate for different protocols. In mid-August, the company announced that Lucent’s microelectronics group will produce the chips StarGen designed, and StarGen will market the product. The company plans to develop another two chips with the latest round of capital, Richardson said.

StarGen will need another round of financing – either equity or debt – before seeking a final exit, which will most likely be an initial public offering, Richardson said, although he could not estimate a time frame for that activity.

Prior to founding StarGen, Richardson was the general manager of Digital Equipment Corp.’s Semiconductor Bridge product line, which was acquired by Intel in May 1998. He founded StarGen with Todd Comins, chief technical officer, David Mayhew, principal architect, Lynne Brocco, vice president of engineering, and Tim Miller, vice president of marketing. The executive management team also includes Richard Riker, vice president of sales and business development.

“This is not easy technology and the StarGen team is experienced in doing switched serial interconnects,” said Zenas Hutcheson, a general partner at St. Paul Venture Capital. They are “one of the best [teams] in the world for this,” and the company is going to keep the lead in the market because it has the advantages of momentum, being early-to-market and being a first mover in the space, he said. The firm is investing St. Paul Venture Capital V, a $750 million fund, which closed in January 1999, and targets seed and early-stage companies in the information technology, health-care, consumer-related spaces.

When looking at the three primary criteria for investments – a great team, a great idea and a great market opportunity – Morgenthaler’s Levine said, “you guys [StarGen] have all three in spades.”