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Tough times for IC startups

Posted: 24 Jun 2009 ?? ?Print Version ?Bookmark and Share

Keywords:IC startup? UWB? venture capital? consumer electronics?

Rappaport: These days it's very difficult to build a fabless company.

Venture capitalist Andy Rappaport still remembers the telephone conference call when it became clear semiconductor startup Tzero Technologies was not going to make it.

The company had designed an UWB chip that delivered the promised bandwidth and distance. At least three consumer electronics companies planned to design the chip in to future products. But that wasn't enough to keep the startup going.

"The problem came when we looked at the volume those customers would be shipping in 2010 and 2011partly based on the economic downturnthe resulting revenue and margin for Tzero and the cost of running the company to make those products successful," said Rappaport, a founding investor in the company. "We said, 'hold on these equations don't solve.'"

With no road to profitability on the horizon, backers tried to sell the company to established chip makers or roll it up into other struggling UWB startups. Ultimately the products and most of the team were sold in mid June to one of its smaller customers, NDS Surgical Imaging, for a fraction of the estimated $60 million investors had put into Tzero.

"For me it was a kind of heartbreaker because the technology was fantastic and the team performed spectacularly," said Rappaport.

The Tzero story likely will be repeated more than a hundred times over the next few years as investors slash through a decade of over-investments in semiconductor startups.

Top venture capitalists say the costs of bringing a new processor or SoC to market are becoming prohibitive. It's not the end of the line for semiconductor startups, but opportunities are changing and narrowing. And raising new funds to invest in high tech companies of any kind is getting increasingly difficult.

Increasingly only the few big chipmakers will be able to afford to design big SoCs, according to Rappaport. They will be smart to use open interfaces so startups still have opportunities to design accelerators for niche functions that can be integrated into those SoCs, he said.

System designers, for their part, will have to learn how to do more in software given fewer chip choices, he added.

"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.

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