Wall Street Journal Online
By SCOTT DENNE
November 7, 2007; Page B5F

Despite its initial promise to revolutionize the supply chain, radio-frequency identification technology never took off in line with the wild projections made by many analysts and venture capitalists.

But the technology has begun to make a slow resurgence with wireless devices that track the physical location of assets, such as expensive manufacturing equipment or hospital beds, within a company or hospital.

It's a slight yet promising tweak for an industry that relied too heavily on the supply chain -- expecting, for example, retailer Wal-Mart Stores Inc. and supplier Procter & Gamble Co. to share information and cooperate on implementation.

And it's giving venture-backed companies new life in their quest to innovate with RFID technology, which typically involves small tracking tags that send or receive wireless signals through various radio frequencies.

Although investments in RFID companies haven't produced the fantastic returns venture capitalists hope for, the technology itself has benefited immensely from the hype that surrounded it a few years ago and the hundreds of millions of dollars in venture capital that came with it.

From 2002 to 2005, venture capitalists invested $658 million into 70 RFID deals, according to VentureOne, a research unit of Dow Jones & Co. The investments helped to mature the technology faster than would have happened otherwise, which brought down the prices of tags and readers, analysts said.

"To a certain extent there was a level of awareness that was generated by all the hoopla on the supply-chain side," said Reik Read, an analyst with Robert W. Baird, who covers the space.

Venture-capital firms have pulled back considerably with investments in new RFID companies, but some older companies have been able to attract new investors.

In March, AeroScout Inc., a seven-year-old company that makes real-time location RFID tags and software, brought in new investors Menlo Ventures and Greylock Partners in a $21 million Series C round.

"We spent a lot of time looking at the supply chain, like other people, but it was difficult to find really good use cases for the technology," said Doug Carlisle, a managing director at Menlo Ventures.

"The fact that there is an RFID tag on a box of diapers doesn't really add any value because they already know how to receive diapers [from a supplier] in a Wal-Mart. As we looked further we started to see tremendous demand to use RFID for finding stuff," he added.

AeroScout's software allows its active tags to operate within existing Wi-Fi networks, rather than a network dedicated to tracking RFID tags. Its products are used to track a range of objects including wafer-lot boxes on-site at Freescale Semiconductor Inc.; mobile equipment and patients at General Hospital in Lagos de Moreno, Mexico; and even prisoners and guards at an undisclosed correctional facility.

"I think it very quickly is becoming a horizontal market," Carlisle said. "When we invested, they had only a few applications, but now they have a wide range of applications on campuses, airports, prisons, semiconductor companies and jet-engine manufacturers."

Another start-up, three-year-old PINC Solutions, whose main product, Yard Hound, uses RFID and a hosted Web service to track the real-time locations of trailers in yards of distribution centers, was able to bring in Horizon Ventures to lead its Series C round in April.

Four-year-old Reva Systems Corp., a maker of network-management devices for RFID networks, attracted $24 million with help from new investors Cisco Systems Inc. and SAP Ventures.

After the bubble, RFID technology became a glimmer of hope for opportunistic venture capitalists looking to invest in an otherwise bleak tech landscape. In 2002, research firm Frost & Sullivan estimated the market for RFID would reach $7.25 billion in sales by 2008.

The technology was championed as a potential revolution in the supply chain by companies such as Procter & Gamble, Unilever PLC and Wal-Mart, which even mandated its implementation among its suppliers in 2003 -- the same year the Food and Drug Administration also tried to force drug distributors to use the technology to track shipments.

Wal-Mart quietly dropped its mandate earlier this year after a tepid response from its suppliers, and the FDA's rule was shot down by a federal court in 2006. Analysts' current estimates of last year's RFID market hover around a sobering $2.5 billion in sales.

In addition to failed mandates, suppliers and distributors hesitated to spend large amounts of capital implementing the technology when most of the return on their investment would go to the companies receiving the goods.

This tepid launch has forced most RFID start-ups to look in other places for revenue. Tagsys RFID and Impinj Inc., which together have raised $180 million in venture capital, have put more emphasis on applications such as tracking high-end items in the supply chain to help prevent theft and counterfeiting. Both companies have been forced to re-evaluate their initial product offering plans.

Supply chain software companies, such as T3Ci and TrueDemand Software Inc., have begun to play down their reliance on RFID. TrueDemand, which less than two years ago described itself as "a pioneer in the development of RFID-enabled enterprise applications," has removed all mention of RFID from its Web site. The company focuses on using information from bar codes to help customers improve supply-chain efficiency.

But the most notable industry casualty was Alien Technology Corp. and its aborted public offering. The company, which has raised nearly $300 million in venture capital, filed in April 2006 to sell up to $138 million in common stock, only to pull the offering four months later. Among the risk factors cited in its prospectus: slower-than-expected adoption for RFID technology.

"One thing that Wal-Mart did for the industry was to put it on the map, but the great expectations of rapid growth didn't take place," said Ronny Haraldsvik, vice president of marketing for Alien Technology.

Prior to Wal-Mart dumping its RFID mandate, in which it hoped to make its suppliers spend capital to streamline Wal-Mart's logistical efforts, Alien Technology was a supplier of technology to a majority of the companies participating in the mandate.

Since pulling its IPO, 13-year-old Alien has brought in a new management team led by Chief Executive George W. Everhart; it has raised $33 million from the private markets and revamped its customer focus. In its last fiscal year, which closed a month ago, 80% of its revenue came from so-called closed-loop applications, such as those for prisons and hospitals. Prior to this year, only 10% to 20% of its revenue came from such applications, Mr. Haraldsvik said.

The company also released new tags and readers last month to specifically address the growing submarket, which has helped Alien Technology double its revenue over the past year, Mr. Haraldsvik said. Swedish company Racetimer AB has begun to use Alien's tags and readers to track runners in large races. Disposable tags are attached to runners and readers are set up at various locations on the course to record participants' times.

Having learned their lesson, analysts are more reserved about the potential for growth in asset tracking than they were about the supply-chain space a few years ago.

The market "is taking off, but it is not going to take off at a 50% clip," said Louis Bianchin, an analyst with Venture Development Corp. "You should count yourself lucky if it grows 15% annually."

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