As a result entrepreneurs are being forced to look elsewhere for funding, such as strategic investors who have an interest in fostering a startup climate. Lawler declined to name any potential investors but many large OEMs through to chip companies have investment arms. However, Lawler said that the startup cycle needs to be made more streamlined to produce quicker returns. His response has been to create Silicon Ventures along with Jim Finch, previously a CEO of Amalfi Semiconductor Inc. and prior to that a senior executive with Broadcom Corp.
Lawler said the fund would achieve a first closing in the fall and will invest in about 15 to 20 startups on relatively short time scales and at the same time pre-negotiate buy-out terms for each startup with one strategic sponsor. The result will be much lower returns than venture capitalists have usually looked for, but a much greater likelihood of getting the company sold, he said.
Traditionally U.S. venture capitalists have looked to get back 5 to 10 times their investment partly because 50 to 70 percent of investments fail. Lawler reckons that by working with a pool of strategic investors returns of 3 times could be acceptable due to a reduced startup mortality rate of just 10 to 20 percent.
This will allow startups to focus on what they are good at, product development. And it allows strategic acquirers to do what they are good at, which is driving customer adoption, Lawler said.
Lawler also said the approach has accounting advantages for using "balance-sheet dollars" to fund startup activity. "The strategic investor wins and the entrepreneurs win because, frankly, they have little other choice."
Silicon Ventures is just setting off on its journey and has initiated activities in Silicon Valley where it is looking for strategic investors and entrepreneurs. "We're looking for 10 to 15 brave strategic investors," said Lawler. "Essentially we are looking for a fit. We will be doing the normal due diligence but it's all about the team."
One of the aims of the strategic sponsorship condition is to keep investment cycles short, at around three years, and to prevent the "perpetual startup" syndrome that has become common in recent years. However, one of the consequences is that while the strategic investors in the fund will be known, the startup companies will likely remain anonymous. Lawler said that maintaining confidentiality between different strategic investors' pet projects and sponsored startups would be fundamental. Lawler said the plan was to make 15 to 20 investments at about $10 to $13 million each.
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.
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