Entrepreneur Turns His Talents to Venture Fund
Steve Kim, who built Xylan into one of Southern California’s fastest-growing companies and sold it for $2 billion, now works with other entrepreneurs as a venture capitalist.
Kim, 50, is managing partner with Alcatel Ventures, the roughly $120-million fund started in Los Angeles late last year by French telecom equipment giant Alcatel. Kim sold Calabasas-based Xylan, a maker of switching systems for computer networks, to Alcatel in 1999. At the time, he owned about 30% of the company.
Alcatel Ventures focuses on early-stage investments of $500,000 to $5 million. Alcatel provided $60 million, and Kim and his team raised the other half from more than 100 individual investors. The fund has invested in 21 companies, including eight in Southern California and six in South Korea.
Kim hopes to focus solely on technology-related companies, including those in the wireless, semiconductor and software industries.
“We’re looking for deal flow,” he said. “It’s tough. There is so much money out there now and so many venture capitalists.”
Kim has assembled a team of partners in the firm’s Century City offices. In February, he hired David Fogelsong from Redpoint Ventures in Los Angeles, one of the nation’s larger venture funds, to focus on software-related companies. Jeffrey Kang, with experience in wireless communications, focuses on San Diego and Orange County start-ups. The firm also has a partner in South Korea and another in Boston.
In a unusual move to help the fund gain deal flow, Alcatel Ventures has put together a “finder’s fee” program under which anyone--a lawyer, executive or accountant, for example--who refers a business can get a portion of the eventual profit if Alcatel funds the start-up.
“We wanted to do something different than what all the venture firms were doing and be more generous,” Fogelsong said.
Although many venture capital funds are raising $500 million to $1 billion to make larger investments in more established companies, Fogelsong said he enjoys working at a smaller venture fund.
“We’re building up a company from scratch, and that’s a fun endeavor,” he said.
Alcatel’s interest in budding tech companies is not unique, of course. Some tech companies have set up venture capital arms to find promising start-ups and gain access to their new technologies. Others, such as Alcatel rival Nortel Networks Corp., invest in young companies through alliances with established venture capital funds, such as Battery Ventures in Boston.
But Philippe Goossens, a vice president with Alcatel in Paris, said he believes his company will benefit by having its own fund rather than investing through other venture capitalists.
“It’s sometimes difficult to combine the goals of venture capital, which are financial, and those of [a large company, such as Alcatel], which are strategic,” Goossens said. “But with Steve, we have a win-win situation. He has respect for both goals.”
Start-ups Alcatel Ventures is betting on include:
* TransDimension Inc., a Riverside company that offers a line of semiconductors called USB, or universal serial bus, host controllers for the non-PC and mobile communications market. Its clients include Motorola Inc. and Panasonic Co. The company was founded by Ping Liang, a UC professor of electrical engineering who took a leave to start it in 1997. Alcatel was the sole investor when it supplied $2.5 million in the first venture round in May, and it owns 33% of the company. Kim and Fogelsong are on the company’s board, and Kim serves as chairman.
* Widcomm Inc., a San Diego company specializing in the wireless data standard Bluetooth, which allows devices such as cell phones and laptop computers to communicate with each other and access the Internet. Alcatel invested $3 million this year in the second venture round, along with Texas Instruments Inc. and Qualcomm Inc. Alcatel owns nearly 2% of the company.
* 3DSP Corp., an Irvine-based company that develops and licenses system-on-chip products for image processing, communications and audio processing. Alcatel has invested $3 million in the second round and owns about a 9% stake. Kim is on the company’s board.
* ProduceOnline.Com, a Pasadena company that brings together produce buyers and sellers on the Web, including retail grocery chains, brokers and wholesalers. Alcatel Ventures, which invested $400,000 in the first round of $3.3 million, owns nearly 4% of the company.
Kim believes that he has an edge on established venture capitalists because of his hands-on experience as an entrepreneur. Before launching Xylan, he founded and served as chief executive of FiberMux, a fiber-optic data networking company.
A company is “not just technology,” Kim said. “It’s the people; it’s all the challenges, the things some VCs don’t see.”
Entrepreneurs say having Kim involved is a plus.
“It’s not just money they provide,” said Liang, TransDimension’s founder. “Steve has an excellent track record in terms of business success, and once we tell people we have Steve Kim on our board, we are more attractive to clients.”
While at Xylan, Kim helped develop various computer switches, including PizzaSwitch, a device that let personal computers connect more easily with local area networks while preventing glitches when large volumes of data were exchanged.
Kim was born in Seoul during the Korean War. In 1976, at age 26, he moved to Los Angeles and worked in an auto parts warehouse, stocking items. He later joined Litton Industries Inc. as a design engineer, and in 1984, he started his first company out of his garage.
Though the fund is managed independently by Kim and his partners, Alcatel plays a key role, with its executives in constant contact, he said. Alcatel specialists in industry segments such as fiber optics will scrutinize a start-up’s business proposal and provide feedback.
Kim said that despite Nasdaq’s substantial spring correction, many entrepreneurs still have inflated ideas about how much their companies are worth--in other words, how much Alcatel Ventures should pay for a stake. In such cases, Alcatel has the discipline to join him in walking away from any deal, he said.
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Times wire services were used in compiling this report.
Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
