EDA 3.0: So you are an EDA startup?

A lot has been written and said in the last few months about the state of the EDA (Electronic Design Automation) industry and how to grow it. Less has been said about EDA startups, their challenges, and growth opportunities.

There is a reason for EDA startups to exist and be supported, namely they have demonstrated a strong advantage in their ability to rapidly implement, deliver, and evolve new technology. Historically new innovation has predominantly come from the startups in this space, but often the new innovation has not turned into successful products and hence profitable businesses. The days of throwing money at startups and hoping they succeed are long past. Startups, their founders, executives, and investors need to take a more strategic approach, ideally before any code is written, but certainly before any significant investment occurs.

As part of our consulting practice with EDA companies there have been several lessons learned that we believe would help startups pave their ways to profitable growth and perhaps the next wave in EDA growth at large.

It's important to note that these lessons apply to all software sectors (i.e. enterprise, SaaS, etc.) that are used in mission-critical applications. Time to market windows driven by Moore's law is what gives EDA a low "forgive-ness" factor. A shortcoming in the EDA tools could cost a semiconductor company 10's of millions of dollars. Design teams most often bet their entire success on their design tools and are less likely to take a chance on unproven technology. Y

et, the same design teams look for the latest and greatest innovation to make their market windows and surpass their competition. This enables new innovation to get looked at, but they only get one chance. How many times have you heard an EDA startup say, "we beat [a large EDA company] in the evaluation, but the customer decided to go with them instead"? Sound familiar?

So where do these design teams go to find new innovation? More often than not, from EDA startups, as historically innovation has occurred in startups " a subject that has been argued for years.

As recent as a year ago, while talking to Mike Fister, former CEO at Cadence, about this subject, he adamantly believed that the statement of larger companies not being able to innovate is a "fallacy". It's not that larger companies cannot develop innovative technology — larger companies are more than capable of developing the technology — it's more the fact that new innovation most often has a hard time reaching the customers' hands.

First, larger (public) companies need product development to return a substantial (e.g. 5x) ROI within a short time frame. This puts a strong damper on risk taking and revolutionary approaches that require "crossing the chasm", as Geoffrey Moore calls it.

Second (and perhaps more importantly), larger EDA companies need to focus on the sales pipeline for existing products and cost-control associated with staffing multiple technology teams in the same space. How many times have you seen a new innovative product either 1) get less of the sales team's mindshare as they're focused on existing product which sells faster and produces higher bookings, or 2) get limited development resources in favor of the incumbent cash cow products in a focus to minimize the overall development cost?

While startups struggle to deliver innovation, they are hampered by the lack of a thriving ecosystem to build upon. Ecosystem health has been compared to game theory's Prisoners Dilemma: In a healthy ecosystem all players thrive, especially the largest (#1 and #2) companies. In a weak ecosystem all players suffer, but larger companies suffer the least.

In the 1990's and early 2000's Cadence strategy was to continuously feed the ecosystem and they heavily benefited from that through acquisitions of startups " where they got a lot of their innovations. Their later approach to somewhat distance themselves from the ecosystem, affected the ecosystem, and hence the cultivation of startups and innovation.

To get beyond the seed stage, startups need 1) overall market growth, 2) venture funding, (which in turn requires), 3) an exit strategy (IPO or acquisition), and 4) strong press and tradeshow to showcase their new innovation.

There is no secret that all three areas need to turn around for startups to thrive again. The RTL-GDSII space has been competitive and the product offerings have been discounted so heavily that it has reduced the size and growth of the EDA industry. Most acquisitions have not met the VC's needs (expectations). This has in turn reduced VC activity in the space. As for press and trade shows, it is not very hard to notice their current struggles.