VCs Debate Value of Chips, Software in ’08

The National Venture Capital Association’s annual predictions tend to be a little soft, since VCs typically don’t step out on a limb to say anything too surprising. But one thing jumps out this year: VCs can’t decide if semiconductors and software are good deals or low-growth opportunities.

Nearly half of the 170 VCs surveyed by the NVCA in its year-end survey say that growth in the semiconductor market will decrease in 2008. Not surprisingly, another 49% say that growth in the software market will be flat.

Indeed, semiconductors and software have lost their buzz over the last couple of years as investors have seemed to focus more on cleantech and social networking. Semiconductors saw a 19% drop in funding year over year, down from $4.6 billion invested in 2006. Meanwhile, software investments slowed by about 9%, down from the $6.6 billion invested during the previous year, according to Thomson Financial (publisher of PE Week).

But that’s all the more reason to invest in software and chips. Or at least that’s what many of the VCs also say in the survey.

VCs say that they expect the software and semiconductor industries to be the most undervalued sectors in 2008. Meanwhile, they predict that cleantech will be the most over-valued industry. In addition, 80% say cleantech will be the most active investment sector.

Nevertheless, while software and semiconductors are not as sexy as a new Facebook application, they continue to attract venture investment. VCs invested nearly $3.7 billion in more than 500 semiconductor companies year to date in 2007, according to Thomson Financial. And more than 1,100 software companies raised $6 billion from investors.

And there have been plenty of liquidity events. Seven venture-backed semiconductor companies went public in 2007, according to Thomson Financial: AuthenTec, Cavium Networks, Entropic Communications, GSI Technology, Infinera Corporation, Mellanox Technologies and Rubicon Technology. Combined, they raised $633 million from the public markets.

Software companies did even better. There were 11 software IPOs during 2007: 3PAR, BladeLogic, Comverge, Constant Contact, Data Domain, DemandTec, Longtop Financial Technologies, PROS Holdings, Sourcefire, SuccessFactors and VanceInfo Technologies. Their offerings raised a combined $1.09 billion from the public markets.

On the flipside, there were only two cleantech IPOs in 2007: EnerNoc and BioFuel Energy Corp. Those two companies raised a combined $152.6 million from the public markets. EnerNoc has done quite well, increasing more than 75% from its initial offering price. BioFuel Energy Corp has fallen more than 52% from its offering price.