Posted on Thu, May. 02, 2002

Networking company
gets $26 million venture inflow

By Wendy
Tanaka
Inquirer Staff
Writer

A new computer chip that can process information faster comes out
about every six months. But systems that funnel that information
into computers storing data have not kept pace, leaving many
corporations with networks that are unwieldy and expensive to
maintain.

Infinicon Systems Inc., of King of Prussia, is working to change
that.

The two-year-old start-up raised $26 million from several venture
funds in February to get its Iris hardware and software system,
which can transfer data to computer servers at three times the rate
currently available, into the marketplace by the end of the third
quarter.

Infinicon's financing was the largest amount invested in an area
firm during the first quarter, according to the
PricewaterhouseCoopers/Thomson Venture Economics/National Venture
Capital Association MoneyTree Survey.

According to the report, venture funds invested $133.8 million in
Philadelphia-area companies in the first three months of 2002,
compared with $155.8 million in the same quarter last year, and
$373.6 million in the first quarter of 2000.

The amount invested in the most recent quarter nearly matches the
$132 million invested by venture capitalists locally three years
ago.

Young companies seek venture capital when they need money to
expand or to commercialize a new product. Often, such companies
cannot afford to borrow from banks and other lenders. In return for
their money, venture funds receive part ownership and some
management control of the business.

Venture capitalists hope to profit in three to five years, when
the business is bought by another company or when it sells shares
through an initial public offering.

While the amount of money invested by venture-capital firms grew
rapidly in the late 1990s, the business has cooled since the stock
market peaked in 2000. The latest MoneyTree survey shows that the
nation as a whole experienced a steep decline in venture investing.
In the first quarter, investments totaled $6.2 billion - less than
half the $12.8 billion invested in the first quarter last year.

During the quarter ended March 31, Silicon Valley companies
attracted $2.1 billion, half the amount recorded in the first
quarter of 2001. Despite the decline, Silicon Valley remains the
number-one area in the world for venture investments.

The New York area's venture investment fell 72 percent - the
biggest drop of any metropolitan region, according to the MoneyTree
survey.

"What you're seeing is some reality in the marketplace," said
William Molloie, a partner in PricewaterhouseCoopers L.L.P.'s
Philadelphia office.

The values of most start-ups have dropped precipitously over the
last year, so venture funds no longer need to invest huge sums to
get good returns, Molloie said.

Richard Fox, a managing director of Cross Atlantic Capital
Partners in Radnor, agreed.

"As bad as this contraction is, it's the silver lining for the
next expansion," he said. "Lower valuations will be more evident,
and stronger companies will be competing for [venture] dollars."

Bruce Luehrs, general partner in Edison Venture Fund's Bala
Cynwyd office, said venture capitalists had returned to investing in
companies with solid business models.

"We're in a normal environment" again, he said. "It's business as
usual. It's back to basics in many ways."

The survey also noted that software companies nationally
accounted for the most transactions and raised the most money during
the quarter. In the Philadelphia area, software companies were
involved in the most deals but raised a total of $7.7 million - less
than a third the amount raised by Infinicon, which is a networking
and equipment company.

Infinicon - founded by Philip Murphy and Todd Matters, former
Unisys Corp. executives - raised $7 million in its first round of
funding in 2000 to develop Iris, a hardware and software system that
aims to streamline server connections and reduce network management
costs.

"Every server in a data center today gets stuffed full of
Ethernet cards, storage cards and other cards... . You have 10 to 12
connections coming out of it," said Infinicon's chief executive
officer, Chuck Foley.

"It's not a big deal for one server, but it is for 2,000 servers.
You literally build your own spider web that you have to
manage."

Iris is being tested at a few computer companies. Infinicon hopes
to sell the systems to such giants as Dell Computer Corp. and Compaq
Computer Corp. Those companies would resell the systems to
corporations and government agencies that process large amounts of
data.

Another area company that attracted more than $20 million is
Protarga Inc., a Norristown pharmaceutical company that raised $24
million. The company, which filed for an initial public offering
Dec. 11, is developing drugs for certain cancers and neurological
disorders.

Contact Wendy Tanaka at 215-854-2752 or [email-masked].

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