GSA working group evaluates new semiconductor startup models to attract investors

November 6, 2012 - Concern over a worrisome trend of underinvestment in semiconductor startups has prompted the Global Semiconductor Alliance (GSA) to form a new working group. Its inaugural mission: identify various alternatives to encourage startups to innovate, woo investors, generate returns, and keep generating sustainable industry M&A.

Investors are getting spooked from injecting capital into emerging semiconductor companies where the rate of return is becoming a longer-shot target. Complex digital IC products can require $100 million or more to develop and a decade or more to ramp-up with revenues; the GSA quotes analyst Andy Rappaport suggesting a semiconductor startup needs to hit $1B in a 5-10 year window off a $100M investment. Meanwhile, the semiconductor sector leads all industries in terms of R&D as a percentage of sales (24% for the 12 months 1Q11-1Q12), says the GSA. Besides the design and mask costs, there’s another $20M-$30M needed just for embedded software to make the design work, "an investment that is not easily recovered in the semiconductor business model where the price is often expected by the market to reflect silicon size," the GSA notes.

As a result, seed/Series A fundings have plummeted over the past decade, from several dozen annually averaging $9M-$10M in the 2000s to now just a handful averaging around $6M-$7M (and just $4.7M in 2011). That’s creating a major "innovation gap" in which there are fewer high-growth startup opportunities available, to be harvested by larger semiconductor firms seeking to bolster their position, leading to a longer-term move away from M&A as a viable strategy to achieve innovation and growth.

Total semiconductor Series A/seed funding, 2000-2011. (Source: GSA)

To address this widening gulf, the GSA has initiated a new "Capital Lite" working group populated with leaders from VCs, fabless firms and IDMs, semiconductor suppliers, and execs from finance, banking, and M&A interests. The group’s first official act is a white paper, "A Startup’s Guide to Surviving an Investment Drought," aimed to help inform and "invigorate" investment activity around semiconductor startups. Assisting this effort is a new resource portal in conjunction with IPextreme as a centralized location for tools and services from the entire semiconductor supply chain.

In the white paper, the group advocates for a "capital-lite" approach: a semiconductor startup sources services (e.g. IP, sales/marketing, SG&A, engineering, shuttle runs, etc.) from a larger semiconductor partner, which in turn reaps the benefits of another revenue source. The group puts out three types of hybrid financing models emphasizing different areas: low ASPs and high-volume markets i.e. consumer; higher ASPs/mid-volume markets i.e. enterprise; and IP-sharing/joint R&D. The group also advocates for a recently formed VC fund, "Silicon Ventures," which proposes to balance the risks between the startup, strategic partner/acquirer, and investors. It also points to the "Lean Startup" approach championed by entrepreneur Eric Ries, visualized as a "distributed startup" ecosystem here third-party technical activities are parceled out. (Adapteva is listed as a success story for this model.)

"We are looking to reverse the current decline in venture capital investment in the industry by re-balancing the risks associated with semiconductor start-ups," stated Silicon Ventures co-founder Ken Lawler. "Our model does this through active collaboration from inception between a start-up, a strategic partner/acquirer, and the investors, which will reduce product development costs, speed time to market, and provide compelling acquisition opportunities for the strategic partners."

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