Why Is This Man Smiling?

You'd think startup wizard Atiq Raza would be getting hammered. He operates in trouble-plagued Silicon Valley, he launches companies in the wildly overbuilt telecom sector, and he runs -- gasp! -- a business incubator. Based on his impressive results, you may want to think again.

Atiq Raza bristled when we used the word "incubator" to describe his company, Raza Foundries Inc. Like CMGI and other famous (now infamous) incubators, Raza was created to organize and fund Internet startups and ultimately sell them or take them public. But when we interviewed Raza for ''Company Builder'' (November 2000), he eyed CMGI's portfolio and couldn't disguise his disdain. "Not our cup of tea," he sniffed. "Companies in the dotcom world are too simple to form."

The markets came to agree with Raza's take, as several overheated incubators, including CMGI, flamed out during the Internet implosion. So why is Atiq Raza smiling? Because he's the head of one of the few incubators that has hatched successful companies. This past July, Cisco Systems bought AuroraNetics, a Raza company that develops semiconductors for fiber-optic networks, in a stock deal worth $150 million. Then in November, another startup from Raza's portfolio, Pacific Broadband Communications, was acquired by Juniper Networks in a stock transaction totaling up to $200 million. Raza capped off 2001 when Magma Design Automation, a company that builds semiconductor design and implementation software, scorched the IPO market, rising 46% on its first day of trading.

"This tough business environment has played tremendously to our favor," says Raza, formerly the president and COO of chip giant Advanced Micro Devices. "As life has become more difficult, the difference between good investors and mediocre investors is becoming clearer."

Indeed, Raza Foundries does more than invest in its startups: It builds them. Raza brings in a team of veteran engineers and business executives to work shoulder-to-shoulder with entrepreneurs, helping them define and develop products, kick down the doors to big customers, cut time to market, and navigate the speed bumps that often hinder startups. In return, Raza Foundries takes a 25% to 50% stake in its client companies.

But the tough business climate of the past 18 months has forced Raza to make some critical changes in his game plan. For starters, he is working overtime to build relationships with big companies. That's how Raza sealed the deal with Juniper. "Early on, we invited Juniper to make an investment in Pacific Broadband," says Raza. "That gave Juniper a chance to look under the hood, and it gave us a chance to develop relationships. It's far easier to lock in a deal when you've already built a successful partnership with the acquiring company."

As capital for funding startups has tightened, Raza has been forced to rewrite another strategy: Instead of launching startups for the M&A market, he intends to build companies and take them public. "In terms of our capital requirements, the gap between building a company that will be acquired and building one for the public market has shrunk," says Raza. "The focus now is on accumulating enough capital to break even. Breaking even wasn't even a concept in 2000."

But, by far, the biggest change in Raza's strategy is this: The company that once scorned the "I" word has now embraced it. About 10% of Raza's companies are born out of an incubator model, which Raza defines as "taking a very early-stage company, giving it time to mature, then funding it properly and helping it grow."

Such is the case with SiSilk Networks, which develops switch-fabric chips (silicon technology that is used by networking-system vendors). Two architects from Raza's R&D unit and several executives from Raza's marketing and business-management teams mapped out the technology and business plans, which were then subjected to Raza's heavy-duty due diligence. Once it got the go-ahead, SiSilk produced its first chip in just 10 months -- an industry record, claims Raza.

"Last year, people said we were an incubator when we weren't; we were full-time company builders," he says. "But part of what we do now is incubate. This environment has forced us to start small and look within for compelling ideas."

Despite some big wins, Raza has been forced to scale back his once-lofty plans. Two years ago, he hoped to launch a host of satellite offices, from the East Coast to the Far East. Instead, he's created just one outpost, near Ottawa. Still, Raza is cautiously optimistic about the future, predicting a "slow recovery" over the next 12 months. "We should see a more robust recovery in 2003," he says. "But we'll never go back to the crazy days of the late '90s."

Learn more about Raza Foundries on the Web (www.razafoundries.com). Read the original, ''Company Builder'' here.

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