First it was the EDA industry that was concerned about flagging VC support. Now those concerns have broadened to the semiconductor industry.
The Global Semiconductor Alliance released a white paper this week from its Capital-Lite Working Group. The group's primary focus is helping semiconductor startups improve their chances of success by providing new business models, partnerships and tools.
The report starts with a gloomy picture. It says: The capital needed for research and development (R&D) in emerging semiconductor companies and the rate of return on invested capital (ROIC) have escalated to levels leaving many venture capitalists (VCs) hesitant to participate in early stage funding. It goes on to provide lots of data about rising chip development expenses, the amount of R&D that has to be invested for a given level of sales and the resultant decline in the number of chip starts. That has resulted in a fairly rapid decline in the number of VC deals and the size of the deal that do happen.
They note a vicious cycle that has been created: The gap between the average selling price and investment required to develop new products continues to widen with each technology node advancement—putting pressure on companies to sell a larger number of units to recover their costs. This, in turn, creates an incentive to design multifunction, complex systems-on-a-chip (SoCs) that can be sold across an array of markets. The complexity of incorporating the non- differentiating, peripheral intellectual property (IP) around the differentiated core-IP offering results in a large total R&D investment—and in some cases exceeds the costs of EDA tooling, tape-out and the R&D associated with developing the differentiated core IP.
But the report points out that a majority of semiconductor companies are successful and do make a return on capital invested, even if not at the levels that VCs would like. How much those overall returns are bolstered by Chinese companies that receive significant government funding is not clear.
The solution according to the GSA paper is to adopt a capital-lite business model. This is based on having a startup partner with a more established semiconductor partner who will be able to supply much of the undifferentiated IP. The startup can source services such as IP, sales, marketing, goods & administrative (SG&A), engineering, shuttle runs, capital, etc. from more sizable semiconductor companies and the larger semiconductor companies can reap the benefits of another revenue source.
They also discuss a concept and book by Eric Ries called “The Lean Startup
” which they view as being applicable to the semiconductor industry even though the concept was created in the Web 2.0 environment where product life cycles are fluid and short and investments are minimal compared to the capital-intensive SoC market.
All told, the GSA believes that it can bring down development costs by 30% and increase the chances of success to around 90%.
The GSA Capital-Lite Working Group’s “A Startup’s Guide to Surviving an Investment Drought
” can be downloaded for free.Brian Bailey
– keeping you covered
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