Investment in semiconductor startups pales in comparison to Internet and software ventures. One of the larger rounds this year went to Goleta, Calif.-based Transphorm, which announced in July that it raised USD 70 million in a deal led by a KKR growth fund. In fact, there is a bit of a run on startups like Transphorm that aim to exploit Gallium Nitride’s low-power properties in new devices and systems. As a group they raised USD 100 million, according to electroiq… which is the same as what Uber reportedly raised from just one investor this week.
The venture capital (VC) view is that semiconductor startups are too risky, cost too much to get to scale, take too long and the exits offer low multiples, not to mention the sector’s spectacular flameouts. It is a contrarian bet, the territory of the corporate venture arm of companies like Intel, Foxconn, Applied Materials, Samsung and Tokyo Electron. (See Corporate VCs Have a Field Day in High(er) Tech )
Venture capital firms have been “smitten” by faster returns on software or Internet ventures, but venture capital investments are beginning to “swing back”, said Vincent Roche, CEO of Analog Devices in an interview published late last year by McKinsey & Co.
Silicon engineers and entrepreneurs are not waiting for VC to start swinging back. They just keep doing startups. “As larger chip operations around the world shed staff, those let-go employees in aggregate are very creative about finding a way to move their careers and ideas forward,” said Peter Clarke, an editor with EE Times Europe and a curator of the Silicon 60 listing of emerging electronics startups when DealMarket Digest reached out for comment.
Entrepreneurial engineers know what industry executives like Roche know: chip technologies are still relevant. “Even software-as-a-service and cloud players rely on advances in hardware,” said Dan Armbrust, CEO and co-founder of Silicon Catalyst (pictured left) in a phone interview with DealMarket Digest.
Entrepreneurs are executing “capital light” business plans whether by necessity or by design. The recently formed incubator, Silicon Catalyst, is part of that trend. Its founders acknowledge that a team can indeed spend USD 100 million starting up a semiconductor company, but “it is not necessary or typical”. It is even possible to use a crowdfunding platform to raise financing as Adapteva did.
IP licensing and systems development business models, which require less capital and offer faster time to revenue, are the type that Armbrust’s team target. Furthermore, Silicon Catalyst’s model for early stage “silicon solution” ventures aims to lower some of the risks and provide the kind of support that minimizes investment. Such ventures also tend to be more affordable for angel investors, less reliant on attracting venture capital funds. (Read more Silicon Catalyst aims to incubate Silicon Valley semiconductor startups.)
The world’s chipmakers are waking up to the fact that they don’t have much of an innovation pipeline to address newer opportunities. While many of the market leaders have launched corporate venture arms to expedite things, industry consolidation ishaving an effect. The number of publicly traded semiconductor firms fell from 152 in 2008 to just 108 by early 2015, according to Armbrust. Indeed, there was USD 79.7 billion in semiconductor industry M&A by mid-July, a volume not seen since 2000 when M&A hit USD 115.5 billion, according to Reuters. (The IC Insights graph here shows the trend.)
Consolidation has an impact. What is left are large well-managed companies attuned to Wall Street’s expectations of having rationalized R&D investment. “To grow, these companies will continually need to supplement their internal efforts through acquisitions of external innovation. It is a complimentary outsourced R&D model popularized by companies like Google and Cisco,” said Armbrust.
Pent up demand for innovation produced by smaller and leaner ventures is important because getting acquired by a larger player is about the only exit ramp that is open for risk capital providers. “Similar to biotech, IPOs for semiconductor startups are rare,” said Armbrust.
New VC Funds
Several VCs with a track record in semiconductors were able to close funds this year. For example, Formation 8 in the US [See Formation 8 raises $500 million for second venture fund by Reuters] just closed a new fund, while Europe-oriented Capital-E closed one in the spring. CID Group in China, which has a track record backing Taiwanese and Chinese semiconductor ventures, announced in May a fund close, and Walden International, a Silicon Valley semiconductor veteran, is currently raising an India focused fund.
Meanwhile, established semiconductor companies are tapping SEMI, their industry association, to access innovators. Last year SEMI started to showcase startups to better connect incumbents and innovators at its annual SEMICON events. This year about the same number (30) signed up to exhibit in its “Innovation Village” in Dresden. [See The Economist’s coverage of last year’s showcase here]
DealMarket Digest asked Anne-Marie Dutron, General Director of SEMI Europe in Grenoble, about the level of interest. “I am constantly being approached by Chinese and Korean companies, some US ones too, to help them find startups. It’s really increased in the last year,” said Dutron.
DealMarket Digest notes that some of those large companies are not just scouting. Some, like Huawei, are buying. [Read more Huawei will use newly acquired Neul as beachhead into Internet of Things]. It is not clear if Roche’s prediction about venture capital swinging back will be very noticeable but one thing is clear, there are plenty of startups on a growth path. And while the founders might not necessarily create unicorns, there are quite likely some gazelles among them.