News & Analysis
Silicon startups get the squeeze
Rick Merritt
6/22/2009 2:52 PM EDT
"These days it's very difficult to build a fabless company making a device with any digital complexity for less than $100 million, and a number have exceeded 200 million," said Rappaport, principal of August Capital and a founding investor in companies such as Actel and Atheros.
Tape out costs can run as high as $20 million, but they are dwarfed by verification costs that can soar five times as high, he said. The payroll for verification teams alone can cost $2 million a month and silicon support teams to serve a couple OEM customers can run another million per month, he added.
Ten years ago, it was not unusual for VCs to fund a startup through a second-generation chip if the market turned bad. Not today.
"It is so expensive to do anything now that no one wants to fund a mulligan," Rappaport said. "What you conclude is the number of chip companies you can fund is a decreasing number even as the overall semiconductor industry continues to grow," he said.
Indeed, Rappaport gave a presentation last year to two groups of executives from fabless chip makers on semiconductor value in what he called the post-fabless era. "No one has disagreed, but there's a lot of frustration in the fact the data is somewhat irrefutable," he said.
Today August Capital has just one silicon startup left in its portfolio, the result of merging multiple companies it has funded. "I think there will be a handful [of chip startups] worth doing over time," he said.
"I tend to agree with Andy," said Mark Stevens, a principal at Sequoia Capital and a member of the venture capital council at the Global Semiconductor Alliance, the trade group of fables chip companies. "We've done just one new early stage startup in the last two or three years, and we've done one later stage deal," he said.
Stevens estimated it takes $40-$100 million and six to eight years to get a major chip startup to a breakeven point. "That's much larger than it was in the '80's or even the '90's," he said.
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| Sequoia Capital, Partner Mark Stevens |
Making money on such investments is tough because "the IPO window has been largely shut for startups for most of this decade," he said. "When you put nearly $100 million in a company and Broadcom or someone buys it for $200 million, if you are lucky, the math doesn't work," he added
Making matters worse, established chip companies are paying less and less for startups. The average acquisition price for a silicon startup in 2007 was $160 million. That dropped to $95 million last year, and it slid down to $65 million so far in 2009, said Lip-Bu Tan, chairman of Walden International and a veteran investor in chip startups.
Stevens pegs the falling prices on the rise of the Internet.
"The big companies are much more agile than they were, so when there's a new networking or video standard the Broadcoms and Intels and Nvidias can jump on it much quicker," he said. "They are not surprised as much by startups, so the startup window has shrunk," he added.
Next: Hand me the Maalox
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Gopal Miglani
6/23/2009 10:08 PM EDT
I disagree with the numbers on software investment required to take the first 2 OEMs to market. With third-party pre-packaged software one can take OEMs to market in a fraction of the costs listed here. we have done this repeatedly for TV & STB SoC vendors.
Gopal Miglani
President, BitRouter
TV & STB Software Solutions
www.bitrouter.com
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anindya
7/1/2009 4:04 AM EDT
This story is very US centric. The author should make attempts to highlight how Indian, Chinese and other Asian startup's contribute and control their expenses to deliver products at much lower expenditure. Though the number of startups in these regions are lesser than what is in US, it is the bad habits of US startups (where the top honchos draw fat salaries or most of the expense is gone into purchasing EDA tools ) which has led to such conclusions being made by the VCs.
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Umashankar
7/1/2009 11:27 AM EDT
If this situation continues, and volume game impacts technology growth, there seems to be a danger of stagnation. With only major players doing fab will all of world's fabless COs run to them some day and queue up those fabs (what abt time-to-market) ?
In any way, time-to-market & volume play seem to be leading to a deadlock.
What can possibly ease the situation?
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rick.merritt
7/1/2009 3:31 PM EDT
Thanks for chiming in, Gopal. I'd like to hear other experiences from silicon startups and their investors...how is this squeeze impacting you?
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flemingo
8/23/2009 3:22 AM EDT
I left the US company I had worked for 5 years and went to Shanghai to start up an IC design house for years ago, with only 3 million dollars funded by a local investor in China. Now, with $15m revenu and $2.5m net earning, it attracts the attention of other VCs. Why an IC design house in China can be more likely be profitable with much less money than in America?
- pay much less for hiring smart local talents
- more close to customers because large electronics OEMs are located in China, pluse some Chinese based companies like Huawai, Hair, etc.
- Define products with better performance-to-price ratio. Customer will gradually accept local IC products rather than expensive chips from ADI, LTC, Maxim, NS, and TI.
At least, I don't have to warry about my job and 401K right now.
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UdaraW
8/3/2011 12:57 AM EDT
Looking back from 2011, the article appears to be spot on in many points. While the cross-boarder investments may survive, in the long run, most of the silicon-based start-ups have folded and the remainder will fold pretty soon.
The VC funds are rediscovering themselves, and I expect the energy and clean-tech sector to be the one absorbing the largest portion of the investor attention in the next decade. As the crude oil resources get inevitably dried-up, alternate-energy start-ups will gain momentum in the next few decades. Hopefully, most of our generation of EE will live to see the day that gasoline is no longer needed.
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