[Red Herring] Raza dazzles investors...

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From: Adam Rifkin (Adam@KnowNow.Com)
Date: Mon Oct 23 2000 - 23:36:47 PDT

Meanwhile, on the successful side of the tracks, there's Raza...
look, another San Jose/Ottawa connection!


Raza dazzles investors
By Dean Takahashi
Redherring.com, October 24, 2000

Not all incubators are created equal. There may be no better example than
Raza Foundries, which on Monday announced a new round of venture funding
that values the company at $1 billion.

The $125 million investment was crowded with communications heavyweights.
Cisco Systems led the round, followed by chipmakers Broadcom, Applied Micro
Circuits (AMCC), Infineon, LSI Logic, PMC Sierra, and Virata, and equipment
maker Siemens AG.

In just one year, Raza has made itself a force to be reckoned with in the
broadband communications chip, equipment, and software industry. While its
fortunes have risen, better-known public and private incubators that focus
on Web startups have been battered.

Idealab, the company that made incubation famous, yanked its IPO plans last
week. Meanwhile, CMGI (Nasdaq: CMGI), Internet Capital Group (Nasdaq:
ICGE), and Divine Interventures have seen their stock prices flounder.

Though Raza is a newcomer, it already has one early success. AMCC acquired
Raza startup Yuni Networks, a maker of terabit switch fabrics, for $300
million in stock earlier this year. Raza walked away with a profit of $110
million on an investment made just three months earlier.

To date, Raza has raised a total of $175 million and is using the money to
invest in new companies as well as to expand its own internal staff of
communications experts. So far, the company has 56 employees with offices
in San Jose, California, and Ottawa, and plans to expand to 150 employees
by the end of 2001, says founder Atiq Raza, former president of chipmaker
Advanced Micro Devices.


Analysts and VCs say that Raza has a winning model. "Raza has one of the
few incubator models that I like," says Vinod Khosla, a partner at VC firm
Kleiner Perkins Caufield & Byers.

The key difference between Raza and other incubators is that incubators
typically focus on general business-building advice. Raza -- which bills
itself as a communications investment company, not an incubator -- has a
narrow or "vertical" focus on communications technology, allowing it to
help portfolio companies develop their core technologies. Raza hires its
own veteran communications engineers and assists startups with deep
technical issues such as defining the functions of a chip, setting a
schedule, and recruiting key engineering talent, Mr. Raza says.

Besides Raza, a few other incubators are hiring technologists who can give
their startups engineering support in addition to financing and office
space. But Mr. Raza says his company has an edge because he has the
reputation to attract the right veteran engineers to his company, which can
offer stock options since it plans to go public some day. (At least one
similar incubator, Incuvest, can make the same claim.)

Raza has taken stakes in 14 companies, including four chip companies, seven
equipment and systems companies, two software companies, and one services
company. Those companies are working on equipment and chips for broadband
communications, such as optical switches that transfer huge streams of
voice and data over the telephone system.

"It's a battle-tested model," says Mr. Raza. "We start with a chick, not an
egg, and we raise it into a chicken and eventually turn it into a [excuse
the mixed metaphor] racehorse."

"We believe Raza Foundries and Raza Foundries partner companies will be key
providers of important new products for the network infrastructure," says
Ammar Hanafi, vice president of business development at Cisco.

Raza isn't without challenges. Its strength -- a sharp focus on
communications infrastructure -- also makes it vulnerable to market
saturation in the sector. But Mr. Raza notes that communications stocks
have held up well in the Internet crash because communications equipment
generates enormous revenues and profits. And the environment for startups
is good because they can quickly come up with products that fill all of the
"seams" in the communications networks as voice, cable, video, and data all
merge into one network, he says.

"There is always a risk if you focus on just one sector, but Atiq is in
good shape because communications is a very broad market as far as sectors
go," says Stephen Nachtsheim, a vice president in charge of venture
investments at Intel.


Kick em when they're up, kick em when they're down. -- Don Henley, "Dirty Laundry"

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