IPhone 4 Sensors Highlight a Bright Spot for VCs

It's a great time to be a manufacturer of microelectromechanical systems (MEMS), as smartphones are increasingly filled with them—Apple's (AAPL) fourth-generation iPhone being just the latest example.The device, which was unveiled June 7, contains several new MEMS including a gyroscope, dual microphones for noise cancellation, a proximity sensor, and a light sensor.Indeed, MEMS are becoming integral as they translate the physical world into the digital one, which is great for not only a variety of old-school semiconductor manufacturers, but later-stage startups as well.

For proof, look no further than the market for MEMS microphones used in noise cancellation technologies. In February, after the launch of Google's (GOOG) Nexus One and Motorola (MOT) Droid, market researcher iSuppli revamped its forecast for MEMS microphones, saying that it now expects worldwide shipments to total 1.2 billion in 2013 vs. a previous forecast of 1.1 billion, in part because ambient noise cancellation would drive higher volumes. The Droid and the Nexus One each have two MEMS microphones, while Nokia (NOK) has released a phone that uses 10. The iPhone 4 sports two.

From Analog Input to Digital Signals

MEMS are tiny machines that take analog input—sound waves, light, temperature, movement, etc.—from the world around them and translate it into digital signals to which the processors inside our devices can react. So when the gyroscope inside the new iPhone or a Nintendo Wii controller realizes it's been moved, it sends out a digital signal that the processor and software can read. MEMS are inside your Rock Band instruments, Qualcomm's Mirasol displays, special suits used to capture movement for animated films—even air-conditioning units so as to make them more efficient.But what's really driving the market for motion sensors such as accelerometers, compasses, gyroscopes, and pressure sensors is smartphones, according to iSuppli.

The investing opportunity in the MEMS sector is large, with more than 30 startups making MEMS products that account for about $550 million of the market today, according to Yole Development, a French firm that tracks MEMS. Yole estimates that by 2015 the emerging MEMS market—such as for gyroscopes—will rise to $2.2 billion. After all, when it comes to handsets like the latest iPhone, the Nexus One, and many more, it's not just their connection to the Internet and operating system that makes them smart, but the MEMS inside, which enable them to react to—and interact with—the world around them.

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