Everyone seems to be competing with the dot.com companies for people, resources, and attention. We all know someone who has jumped from a "regular" company to a web-based enterprise, worked there for a year, and become—at least temporarily—wealthy. The EDA start-ups, however, have highly publicized problems getting to the IPO stage. They're struggling to secure that next round of funding—as seen in the case of Genedax, a company that positioned itself as a web-based EDA company—because the venture capital community and their investors have decided that the buzz is where EDA is not.

A number of the venture capitalists in the high-tech arena are noting that EDA doesn't offer an interesting focus for investment at this point. The reasons? The size of the EDA market and its perceived potential for growth. The total EDA market, including new licenses and maintenance, remains under $4 billion dollars. And, after accounting for the market share of the four largest companies in EDA—Cadence, Synopsys, Mentor Graphics, and Avanti—the other 300 EDA companies are left trying to divide up the remaining $500 to $700 million in revenue among themselves.

In the EDA industry, a very "large" target market is measured in units of 10 thousand licenses, at best. At the high-end of this market, no EDA company is currently able to lay claim to even 100,000 units, or licenses, as a potential target for the highly innovative products they produce. The costs of development for EDA tools can run as high as $10 million, and the potential sales have to be extremely good for most of these products to turn a profit after such huge development costs. In fact, for the most complex products, the combined costs of the sales personnel, support engineers, marketing folks, and materials, consume half of the sales price alone. Clearly, a company has to sell over $25 million worth of products, maintenance, and services to recover the base costs of initial tool development.

In comparison, web companies can develop a site for well under a $1 million. The millions of dollars web start-ups do, in fact, need are used for advertising to getpeople to recognize—and remember—their site name. For instance, even though most of the ads for web sites during this year's Super Bowl were not particularly memorable, the sheer number of Internet companies that spent over $100,000 per second for air time clearly reflects the desire to create site awareness. The big sites on the Internet have tens of millions of viewers. If you're really brash, you can project possible markets of billions of people when India and China become Internet-enabled. These huge potential markets imply a great opportunity for short- and long-term growth, a fact not lost on the investment community.

When web companies project over a hundred million users, even if they can figure out how to earn as little as $1 per user, it's easy to envision generating huge numbers of dollars from the relatively small cost of a few servers and a high-speed link out to theInternet. The investors can justify, therefore, a largevaluation for the company based on these forward-looking revenues.

In our industry, EDA companies fall into the same category as other medium and small software companies struggling just to reach $10 million in sales per year. These companies are considered profitable investments for the venture community if they can exceed $25 million in sales. When a software company goes public, selling shares at a few multiples of actual revenue, the investors get their money back many times over. Ordinary software is a fairly low-risk investment; the initial investment is low, the relative risk is fairly low, and the return is very high.

Unlike the other software and Internet companies, however, EDA is a high-cost, high-risk investment. Because the EDA community hasn't yet learned how to set up a pricing structure which will guarantee a reasonable return on investment—and can't seem to hold the line on discounts—the venture capital community seems justified in avoiding investments in this crucial industry.

Does EDA need to reinvent itself as a dot.com industry? If that process consists of re-evaluating the EDA business model to insure more robust profits on dollars spent, then that transformation would be a welcome development.