Well, the differenece in our experience and point of view may be related to the fact that you seem to be a digital engineer and my experience is mostly in the analog/mixed signal area. Design tools are indeed expensive, in the $100k+ area, and you can tape out a chip with a regular maskset and get your 20 wafers for about $120k. So, certainly for $1-2Million a start-up in my area can demonstarte its technology well enough to get a second round funding which enables it to go into production (assuming the technology and the silicon works). Furthemore, I did not argue that all semiconductor start-ups are successful, far from it. If you talk to VC-s they will tell you that only one in ten start-ups is expected to be successful, whether in semiconductors or in any othet field.
Whoever wrote this article must have been away from Silicon Valley and its semiconductor industry for a decade or more.
First, it does not take a fortune nowadays (in the context VC type money) to get a fabless semiconductor start-up off the ground. In fact it costs very little, in the range of $1-2M. It is true that to get a semiconductor start-up to the desired liquidity event can take 6-10 years and can cost tens of millions of dollar of venture money. However, the reason is NOT inherent in semiconductor industry. Most of the time it is due to one (or typically more than one) restarts or resets. These, in turn are typically due to either technical problems with the founders' original idea, or, more often, their lack of understanding the target market and its needs and values, as well as problems with execution. Hence, if VCs did a better due diligence (especially better due diligence on the technical and marketing assumptions of the start-up) they could de-risk their semiconductor investment significantly without resorting to "pre-selling" it as recommended by this author. In my experience most VC-s are negligent in technical due diligence, taking the maxim that success depends mostly on the quality of the founders to the extreme. If VC's do not want to take risk then what is their raison d'etre?
Second, as it is pretty well understood in Silicon Valley liquidity events when a large company buys a start-up company much more often than not shortchanges the engineers whose blood and sweat built the start-up the company. Hence, I am pretty convinced that this model, if it becomes the norm, will slowly but surely will kill semiconductor start-ups, as no engineer in his/her right mind want to work 60-70 hour weeks for years solely to enrich the VC-s.
I just wanted to clear one thing up. We don't assign a Strategic Partner to a startup. It's a collaborative process. For the relationship to work, the entrepreneurs and the Strategic Partner have to have close alignment and be of like minds. What we do is help the entrepreneurs identify Strategic Partners that might make a good potential matech. Ultimately, however, the entrepreneurs themselves have to decide which Strategic Partner is the best fit for their startup. Similarly for the Strategic Partners. They too must determine the startup that is most aligned with their future needs.
I heartily agree with many of the comments here and applaud the work of the GSA in trying to stimulate a conversation in the global semiconductor community about this topic. I am proud to be part the Cap Lite Working Group there that worked with a great group of people who invested lots of time and effort in assembling a large coalition of companies that are genuinely interested in helping technologists get new ventures off the ground. You might want to check out the Cap Lite Resource portal to get a sense of the companies that are part of that effort. You might even want to check out a local Silicon Valley TV program (Press Here) that ran a story on this awhile back called Show Me The Silicon.
I think Angel and the SKTA Innopartners team are just the start of a wave of incubators that are part of an overall pivot in the semiconductor industry away from the VC-community. There will be much more reliance on industry partnerships, spin-outs, etc., that will enable new ideas to get the oxygen they need to grow. You might also be interested to check out Angel in an interview segment we did together earlier this summer on this topic.
In the end the importance of having new semiconductor companies forming is important not only for the semiconductor industry, but for the health of the entire supply chain. While the industry has its naysayers, I feel that there is still so much innovation that has yet to come that Silicon Valley is far away from becoming the next Detroit.
A fast exit solves many problems for investors and entrepreneurs alike. Another advantage of this kind of model is that the strategic partner is involved very early in the development of the company and its product. This provides the startup with laser beam focused targets with regard to market segment and technical requirements. Therefore, the startup is not distracted or over-building a product and is able to exit that much quicker.
The quick exit strategy approach is certainly a good approach. It short circuits the worst part of being a semiconductor startup: waiting until the market materializes or until your customers are successful in selling to the end market. Bigger companies have deeper pockers and are much better positioned to play the long game.
I was recently on a panel at the GSA Entrereneur Conference. Tallwood Ventures and Intel Capital had a number of examples of deals they had funded with a Call Option for Intel. Given that we technically opened our doors in April and our accelerator is currently under construction, we are far too new for exit success stories.
We have had discussions with well-known, Sand Hill Rd VCs. Overwhelmingly, they like our model and many have committed to participating in a Series A for our accelerator graduates. While the returns aren't as high as the traditional VC model, our deals are largely de-risked. Before committing any money, the VC knows what the minumum return is going to be for a particular startup. Moreover, the velocity of their capital is increases dramatically. Instead of a typical fabless semiconductor time-to-money horizon of 8 to 10 years, our startups exit to the strategic partner in 1 to 2 years.
The flip-side, of course, is that there is also a cap on the returns with the call option. Realistically speaking, there aren't many startups that will return the 10X cash-on-cash that we saw in the late 90's. So a cap isn't much of a deterent. That said, a 3X to 4X return in 3 to 4 years is hard to pass up.
As we unveil EE Times’ 2015 Silicon 60 list, journalist & Silicon 60 researcher Peter Clarke hosts a conversation on startups in the electronics industry. Panelists Dan Armbrust (investment firm Silicon Catalyst), Andrew Kau (venture capital firm Walden International), and Stan Boland (successful serial entrepreneur, former CEO of Neul, Icera) join in the live debate.