After a solid freeze, venture capital is starting to flow more freely. In just the past two months, networking-chip vendors Brecis, EZchip and SiberCore each raised about $20 million. Although their products vary, each of these companies has the three things VCs are looking for: innovative technology, working silicon and significant design wins.

On the flip side, consolidation continues to occur. Processor vendor Lexra ran out of money; KLSI terminated development of its ternary CAMs; and Micron Technology agreed to pool its TCAM development with NetLogic. This fallout is actually good news for the remaining vendors, which now have a better chance of survival.

After four dysfunctional years, the venture-capital system is starting to work the way it should. After funding every possible business plan in 1999 and 2000 and then not funding any in 2001and '02, VCs are now rewarding good companies and weeding out weak ones.

The biggest problem for chip vendors remains the lack of new platforms at their customers, the system makers. Last year, many chip vendors saw committed design wins vanish when the customer terminated the project or, worse yet, went out of business.

As with the chip vendors, the weaker system vendors are disappearing, and the larger ones have mainly stabilized their R&D investment, albeit at lower levels than two years ago. Design wins, and even new platforms, are appearing again.

These new platforms typically target the access and metro segments. In addition, data center equipment is being redesigned to handle new security requirements. Even the enterprise LAN is growing in capacity and changing with the deployment of wireless connectivity.

OEMs designing new platforms are building for the future. Any systems now in design will probably be sold from 2004 until at least 2008. Thus, despite the slow deployment of 10-Gbit/second connections today, high-end systems must support large numbers of 10-Gbit connections as well as backplanes with at least 320-Gbit/s capacity. There are plenty of off-the-shelf silicon solutions for such systems, and the vendors of these chips are finally seeing some action in the market.

Linley Gwennap is founder and principal analyst of the Linley Group (www.linleygroup.com).