EDA startups are seeking nontraditional investors, such as foreign funds looking to enter the US technology sector.
For the record, I'm an EDA lifer. That may seem clever and even witty, but I consider my various experiences working with a variety of talented professionals on-the-job training that I wouldn't trade for anything. It's put me front and center at some of the most interesting business situations and technological breakthroughs you can imagine.
My experiences as a mergers and acquisitions professional at Cadence, as a startup CEO looking for funding, and now as an angel investor have led me to think a great deal about the electronic design automation investment climate. We've had to readjust our business models and get more creative on the funding side, yet I am optimistic about the industry's future.
As has been long reported and dissected, the traditional venture capital route is closed today to early-stage EDA startups and emerging companies. This is especially confusing because several funds claim to invest in infrastructure companies but won't touch the EDA sector. I reconfirmed this recently while checking on an investment opportunity that previously would have had VCs lining up to fund the company with customer endorsements, production-worthy products, and credible technologists. Here are the answers I got from four different VCs, all of whom have EDA investments or had them in the recent past.
- "This is likely not a fit for my fund -- EDA is likely not a growth area."
- "Unfortunately, I will pass on the opportunity. We have struggled with the market size of EDA in the past."
- "Unfortunately, this is not a focus area for us at this time, due to the industry structure."
- "I will check it out and get back to you. I must forewarn you that we are negatively predisposed to semi deals."
Every EDA entrepreneur approaches the same few angel investors, most of whom were successful EDA entrepreneurs at one time. Most of these investors are approachable, and many are willing to invest in a seed round of funding. However, angels have limited resources and are not a substitute for VC funds.
A strategy touted by industry analysts for many years recommends that a collection of private EDA companies merge. The newly formed company would be a viable initial public offering candidate and a potential acquirer of startups. Unfortunately, that has never become reality for a variety of reasons, ranging from valuations to the selection of executive management. Another route that seems to have contracted significantly is investments by large EDA vendors in promising startups.
Now that we have the negatives out of the way, let's look at the alternatives and the reasons to be more optimistic. First, the goal of the founding team should always be to build the company on a small amount of money to limit dilution.
The Jumpstart Our Business Startups (JOBS) Act is intended to make it easier for small companies to go public in the US by easing some securities regulations. It also enables crowdfunding in all kinds of industries. You can bet some savvy entrepreneur is developing an EDA crowdfunding site.
EDA startups are seeking nontraditional funding sources, such as foreign funds looking to enter the US technology sector. For example, Breker Verification Systems, where I am a board member, recently raised $5 million from a Far East fund looking to diversify into the Silicon Valley technology industry.
Some companies have taken funding from customers and industrial partners through an equity investment or early purchase/co-development format. That's what Cadence did in its formative years with various customers. On a smaller scale, when I was CEO of Certess, we benefitted from an early investment from STMicroelectronics, which was instrumental in helping us raise additional funding. In these two cases, it worked well for both parties, and the customer got early access to new software. This is an important funding avenue for EDA startups, because semiconductor companies are craving innovative technology.
From my perspective, the way to expand the industry and reclaim fund managers' interest is to expand the industry to adjacent technologies, demonstrating growth potential along with creative business thinking. An example is X5 Systems, a technology company that introduced breakthrough antenna synthesis software to replace the black art of antenna design. It attracted me as an angel investor because it positioned its antenna synthesis as a key component of mobile systems design. Note that X5 chose to attend the International Microwave Show and not DAC this year, though I am convinced it is an EDA company.
As an EDA lifer, I've witnessed many of the sector's ups and downs, and I can't deny that it is rebounding from a down. Even so, I am optimistic about the future, and I encourage you to be, as well.
Michel Courtoy is a member of the board of directors at the EDA startup Breker Verification Systems.