I sat down with one of the most well-known and influential CEOs in the EDA industry – Kathyrn Kranen, the President and CEO of Jasper Design Automation. Kathryn is responsible for leading Jasper’s team in successfully bringing their technology to the mainstream design verification market. She has 20 years EDA industry experience and a proven management track record. While serving as president and CEO of Verisity Design, Inc., Kathryn and her team created an entirely new market that we now call design verification.
The discussion went far and wide and if you know Kathryn, she manages to pack a lot into a short space of time, so this is both abridged and will be published in several pieces.
It seems to me as if the fundamental business model for EDA has changed in the past 10 years or so. We used to see startups do the research and development and as soon as they had a customer or two, they were acquired by one of the large EDA companies. Until the recent spate of large acquisitions, that appeared to have stopped. Is this a fundamental change?Kathryn:
Seven, eight or ten years ago on the heels of the big flush of funding from the 2000-2001 EDA IPOs there were a lot of small companies hoping to make it big. I think there was a drive to take the companies all the way and so we didn’t see too many IPOs at that time. But, I haven’t necessarily seen a complete halt or a very noteworthy drying up of the small company sales. Actually, I think the size threshold for a big company to acquire someone has gotten much higher because they, the big EDA companies can’t do much with three guys and some code. They don’t know where to put the acquired company in their organization if it’s that small.
Looking around at DAC this year, it just struck me how many companies there are ten or fifteen years old.Kathryn:
That is actually very true and it’s not unique to EDA. This is because the size requirements for an IPO have more than doubled. The EDA IPOs a decade ago were by companies with trailing revenues of between $11.5M and $22M, and barely profitable if at all. Jasper has already been profitable for nine consecutive quarters, and yet that’s not enough. You have to be much larger from a revenue perspective. Given this landscape, you would expect companies to aggregate. Bigger fish acquire littler fish to accelerate growth inorganically. One way or another, you have to get to at least twice the size these days to IPO.
In fact one of my venture investors is Foundation Capital; they were my B-round investors. Their investment in Jasper is nine years old already, and they said, hey, no worries whatsoever. Of the last several IPOs by Foundation portfolio companies, one was fourteen years old, one was twelve years old, etc. And this is true across all the industries - companies have to be bigger just to endure the cost of going public. Although the recent Jobs Act eased a lot of the reporting requirements, only time will tell whether that lowers the hurdle to IPOs. All the investment bankers will tell you, “oh it’s going to be much easier now,” but it’s not going to lower the revenue requirements very much. Since you need to be double the size, it stands to reason you’re going to be older. High-quality VCs like mine have learned to be patient.
The other reason there are more twelve or fourteen-year-old companies, is because the technology challenges are harder now, at least in EDA. All the easy problems have been solved, as one of my board members says. You need more iterations of learning from customers, and more marketing, to grow big enough to achieve critical mass. And you need to be critical mass even to be acquired at a decent valuation, because, you’re so much easier to integrate. I’ve had several of the big companies talk about their acquisitions, and one of them even said, “I wish all the small companies (though we’re considered one of the larger private companies now) would go aggregate themselves so that we can buy in bigger chunks.” They don’t want to buy an entity that has revenue of less than 10 million, or even less than 20 million, because it’s too hard for them to scale that business. So I think there’s a reality that the industry is more mature. Every decade it gets more mature, and we’re seeing that harder technologies take longer, and larger entities are more valuable and easier to integrate into huge entities. Also, the larger the acquirers are, the larger the small companies need to be to be relevant to them.