SAN MATEO, Calif. Once considered the shining stars of the venture capital community, many startup companies designing processor cores for next-generation networks and sophisticated system-on-chip devices are struggling to stay alive. As they contend with tenuous business plans and a lackluster economy, startups are cutting staff, seeking emergency cash infusions, courting acquisitions or radically changing their product plans.
The young intellectual property (IP) companies suffering the most are those that bet big on the networking infrastructure market, the hardest-hit segment of the electronics industry. But the market collapse has left few safe havens, casting doubt on a raft of processor startups that had hoped to sell their intellectual property in droves without having to dirty their hands with back-end chip design.
Among the startups that appear on the edge of collapse is Clearwater Networks Inc., a once high-flying network processor vendor that observers said has struggled to get its product out in the face of funding problems. The company has seen the departure of founder and chief technical officer Mario Nemirovsky and two CEOs.
Clearwater's struggles are indicative of a wider shakeout among makers of network processors. At least two other companies Acorn Networks and Entridia have succumbed to the market slowdown and more casualties are expected. "The issue is that way too many companies, particularly in the network processor market, [were] funded under a good economy. But frankly, a lot of them were bad ideas," said Linley Gwennap, founder and principal analyst of the Linley Group.
One way out is a merger. Bops Inc., a Mountain View, Calif., provider of programmable broadband DSP cores, is "looking at potentials of acquisition," said chief executive officer Carl Schlachte.
As startups become more desperate for cash, management upheavals are common. TriMedia Technologies Inc., a Philips spin-off that develops media processor intellectual property (IP), lost its chief executive last summer when he couldn't raise enough venture funding. He was replaced last month by Sunil Sanghavi, who is said to be bringing much-needed financial commitments to the company.
Bops recently backed off from its latest round of fund raising, said Schlachte, after being approached by an unnamed suitor for possible acquisition. Though Schlachte said Bops has "cash in the bank, and people are gainfully employed at our company," he acknowledged it has been making cutbacks. "It has been a tough, tough year. We are watching nickels and dimes."
Slow road to royalties
A fundamental problem for IP companies is the time it takes to generate revenue. Most can't get royalties until customers ship products based on the licensed IP cores. And with every corporate move under increased scrutiny in a sluggish economy, customers are less inclined to enter multimillion-dollar licensing deals.
Bops claims to have three licensees, but the first product won't show up until the fourth quarter. "Every IP core company is facing exactly the same problems," said Schlachte. To hasten its IP into real silicon, Bops is offering licensees more deliverables for use in building a system-on-chip, including sample hardware and software designs and engineering services, a strategy it calls "SoC in a box."
"The sooner our licensees start shipping their products, the more quickly they pay me royalties," said Schlachte.
Bops is also steering clear of the communications bloodbath in favor of consumers. Rather than pushing such applications as voice-over-Internet Protocol gateways, Bops is promoting its DSP cores for wireless LAN chip sets and for MPEG-4 encode/decode, MPEG-2, Dolby Digital and real-time streaming.
Other startups are trying to take control of when and how their technology is introduced by offering standard chips. Some are scrapping the pure-play IP model entirely and becoming fabless semiconductor vendors. Lexra Inc. (San Jose, Calif.), a supplier of MIPS-compatible CPU cores, has taken the latter approach since settling a patent-infringement suit with MIPS Technologies Inc. last month.
Lexra's decision to settle with MIPS was part of a larger plan to jettison most of its RISC and DSP cores and focus on a single architecture for network cores. The shift occurred when Lexra found it couldn't compete in some markets. "One of the areas that was at the heart of the battle was wireless LAN," said president and chief executive officer Charlie Cheng. "But we would have had to go head-to-head against [processor core heavyweight] ARM, and it wasn't clear that we could win."
As part of the settlement with MIPS, Lexra took a MIPS license something it had tried to avoid since its founding. It also turned over its IP claims to MIPS. For these concessions, Lexra will continue to develop its LX8000 net processor for OC-768 core routers as a standard processor.
By using a foundry to produce standard devices, Lexra said it won't have to rely on its customers to fund the $10 million to $20 million development effort. "In 2001, every single one of our licensees in [OC-768] canceled their project," Cheng said. "We knew that unless we did something [dramatic] our technology won't see the market."
While Lexra dodged a bullet by settling with MIPS, picoTurbo Inc. (Milpitas, Calif.), did not fare as well in its battle to design and sell ARM clones. In a settlement reached with ARM last month, picoTurbo must cease licensing its ARM clones and work to migrate customers' products to ARM Ltd.'s road map.
"It was costing them a bloody fortune to maintain lawyers and I know with the economic situation that the funding, especially for picoTurbo, was a little bit fuzzy," said analyst Markus Levy at MicroDesign Resources.
Java accelerators and coprocessors are a market ripe for consolidation. There are some 10 providers of these specialty devices, most of which are still being evaluated by customers. Winners and losers should become clearer in six months, when a benchmark group called EEMBC releases results of its Java accelerator benchmarks, said analyst Levy, who serves as EEMBC's president.
Now that the cell phone industry has endorsed Java, the market should be big enough to sustain at least four players, said Mukesh Patel, president and chief executive officer of Nazomi Communications, a provider of Java processor cores. Patel said he is confident Nazomi has the right team and strategy to make the cut.
"We're not profitable, but we do generate revenue and we have plenty of cash and have no concerns about funding," he said.
Profits have also been elusive for TriMedia (Milpitas, Calif.). Still, CEO Sanghavi said, "We believe that we are absolutely in the right market with the right business model." The main target for the company's very long instruction word core is consumer video applications, an unsettled market that can benefit from TriMedia's programmable platform, he said.
But some industry experts are concerned that Philips Semiconductors' successful TriMedia-based standard products may be stealing the startup's thunder. Philips is working on a standalone processor, custom products and a Digital Video Platform-based chip that combines MIPS and TriMedia cores. Given the economy, some industry watchers say customers are more likely to buy one of these standard products than to invest millions in taking a TriMedia license and building their own.
Sanghavi, however, said the custom option is attractive to some. National Semiconductor Corp., for example, is designing a reference platform for smart displays that ties together its X86-based Geode processor with Philips' TriMedia processor, but plans to eventually integrate a licensed TriMedia core into a Geode processor. "It allows me to tell our customers 'you can have it your way,' " said Sanghavi.
National, for its part, said it expects to deliver a Geode processor with an integrated TriMedia core by early 2004 or sooner.