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Marvell's Sutardja to VCs: Wake up

Posted: 15 Aug 2005 ?? ?Print Version ?Bookmark and Share

Keywords:fabless semiconductor association? fabless? eda tool?

Sehat Sutardja, chairman, president and CEO of Marvell Technology Group Ltd had a message for venture capitalists during his keynote address Thursday (Aug. 11) - time to wake up.

Speaking at the Fabless Semiconductor Association (FSA)'s Distinguished Speaker Series and Expert Roundtable here, Sutardja said that VCs need to realize that the traditional exit strategy - an initial public offering (IPO) - is no longer a realistic goal for the vast majority of fabless companies.

Citing statistics compiled by the FSA, Sutardja said that in the past six years the total number of fabless companies has doubled, yet there have been only 16 fabless company IPOs since 2000.

He blamed the dearth of fabless IPOs on two things. For one, he said, most fabless companies have limited human resources - according to the FSA, 67 percent of fabless companies have fewer than 100 employees.

Secondly, Sutardja said, most fabless companies misuse their capital, spending far too little on R&D. He said the typical fabless startup splits its capital expenditures equally among four categories: R&D, management/overhead, fixing mistakes and sales/marketing. Even within the 25 percent spent on R&D, he said, not enough is spent on developing core intellectual property (IP) - too much money is spent on expensive EDA tools, licensing unproven third-party IP and other items that are not key to product differentiation.

Sutardja said VCs, using Marvell's success as a yardstick, want fabless companies to develop multiple products. But, he argued, it took Marvell years to get established as a multi-product company, and with the changes that have taken place in the industry over the past 10 years, it could take today's fabless companies even longer. VCs should be pushing fabless companies to concentrate on markets where they can provide a truly differentiated product, he said.

"One could say that the VCs are part of the problem," Sutardja said. "They don't realize that things have changed. A lot of things that [Marvell] did have gotten a lot more complex."

Sutardja listed several things that Marvell did after he co-founded the company in 1995 that are no longer part of fabless company strategies. For one thing, he said, Marvell did not spend 25 percent of its capital on management - he and his fellow founders originally went unpaid. He said even after they began drawing salary they were the lowest paid employees in the company for a time, earning $40,000 to $50,000 per year.

Secondly, Marvell started out using tools developed at Sutardja's alma matter, the University of California at Berkeley, rather than buying expensive EDA tools, he said. Leading-edge EDA tools are no longer an avoidable expense given the complexity of current technology, he added.

Today's fabless company needs to pursue a "super ASIC" or "virtual customer-owned-tooling (COT)" model, create numerous symbiotic partnerships and focus on core competencies that will differentiate their products in order to succeed, Sutardja said.

In the ensuring panel discussion, Jim Jungjohann, managing director and co-head of technology investment banking at CIBC World Markets Inc., disagreed with Sutardja somewhat, saying that VCs are getting more comfortable with a merger-acquisition exit strategy. VCs, he said, are also learning that success takes more than just assembling the right team.

"Some VCs still go too far," Jungjohann said. "That's not going to change. Every VC is going to step up to the plate and take five swings before they are out."

However, Jungjohann said, the semiconductor model is still seen by the VC community as one of the best models - if not the best model.

Jorge del Calvo, a partner at securities law firm Pillsbury Winthrop Shaw Pittman LLP, said the amount of money that VCs are willing to invest in a single company is dramatically less than it used to be. A fabless startup, he said, can expect a maximum of $25 million in VC funding. Today's startups must have offshore and outsourcing components to its strategy, he said.

"It puts a tremendous amount of strain on the management team," del Calvo said.

Del Calvo pointed out that every idea that gets funded is "then copied 10 times" by other companies searching for seed money. A lot of current VCs, he said, have operating backgrounds and are staying away from opportunities that try to compete on cost without technical differentiation.

- Dylan McGrath

EE Times

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