GENEVA, Switzerland – Ken Lawler, founding partner with Silicon Ventures Inc., laid out his firm's innovative approach to backing chip companies with a $200 million fund, at a European executive conference organized by the Global Semiconductor Alliance (GSA), held here this week.
Recently formed Silicon Ventures intends to work with strategic investors in what Lawler calls a "balanced risk model." The model requires active involvement from the start between a potential acquirer, the entrepreneurs and the investors. A major difference from conventional venture capital funding will be that startups will only get money from the fund if it can attract a strategic sponsor who will agree the price at which to buy the company if and when agreed development milestones have been met on time. And that time will be relatively short. Lawler showed the conference spreadsheet calculations based on a 10-quarters investment period although the time will vary from company to company.
Lawler, who previously spent 17 years as a general partner at Battery Ventures, takes as his premise that the venture capital sector has now abandoned the semiconductor industry and in particular the digital fabless sector where chip development costs have become punishingly expensive. "The semiconductor ecosystem is drying up fast," he told the GSA conference delegates.
And this has happened because over the last 10 to 15 years too many semiconductor startups have taken too much money and too much time to get to market, Lawler said. But it is not just the chip development costs that are hurting the startups. The real problem is waiting for expected markets to take off, which then requires chip iterations or "doubling down" for startups to stay in the game. The big problem is "the million-dollar per month burn rate over three, five, seven years," Lawler said.
The venture capitalists have reacted to the aggregate poor return on investment and gone elsewhere. And certainly many of the market research tallies of chip startup funding activity show what Lawler described as a "countdown to oblivion." Lawler presented a chart to the GSA conference delegates a chart that showed only one semiconductor startup in North America has received Series A investment in 2012. "The data may be under-reported but the trend is clear," he told EE Times on the sidelines of the event.
The dearth of companies being born in the semiconductor galaxy is causing concern amongst EDA companies who see chip startups as a source of seats to whom to sell their software and amongst larger chip companies as well. "The merger and acquisition opportunities are drying up for the bigger semiconductor companies," Lawler added.
Ken Lawler, founding partner with Silicon Ventures tells the GSA European Executive conference there is a way to get fabless chip companies funded.
The semiconductor business has changed, the glory days appear to be over and are not likely to come back. It is a different world now and no amount of nostalgia is going to change that. In particular, the old business model of fabless semiconductor companies is, for all practical purposes, dead, when it comes to start-ups and emerging companies (you can find more about it in this presentation: http://www.design-reuse.com/exclusive/kaben/). There is a need for new approaches that have a chance to bring significant ROI justifying investments.
Just because the old ways of doing business are no longer applicable, this does not mean there is not a need or a demand for semiconductor start-ups and their innovation - quite contrary! But the way we go about it has to be different. To avoid repeating myself, I refer you to this article: http://www.eetimes.com/electronics-news/4074052/Letter-to-the-editor-IP-cars-share-common-ground
The buyout portion of the plan is also tricky. A truly entrepreneurial company will always figure they are worth more than what the sponsor is willing to pay as a pre negotiated $$$ amount.
The sponsor has to already be interested in the company to be acquired, otherwise why sponsor. I can see the sponsor as considering Silicon Ventures sharing the risk somewhat for a "3%-5% return". It seems to me that the real value to the sponsor is off balance sheet development which they may have to absorb (the "buyout") later down stream.
To work, there would have to be many ways locked in to do the deal, and not many ways to get out of it - for both parties.