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Chip start-ups take a nosedive

Posted: 18 Feb 2014 ?? ?Print Version ?Bookmark and Share

Keywords:chip? start-ups? venture capitalist?

The problem statement
Silicon Valley-based venture capital firms who once nurtured the semiconductor industry are forced to spend money on the more lucrative web start-ups instead due to scant returns. So it's not entirely clear what will be the source of tomorrow's chip innovations.

That was the conclusion of a panel of veteran semiconductor chief executives and investors at the International Solid State Circuits conference (ISSCC) here. The group was modestly optimistic that advances will come from a variety of sources.

A few big companies such as Apple, Google, and Microsoft are getting more vertically integrated by spending more on semiconductors. Developing countries such as China and India are investing in the industry, though they debated the pros and cons of government involvement. And a handful of investors still nourish a few chip start-ups.

We excerpt below some of the more insightful comments and lively exchanges from CEOs T.J. Rodgers (Cypress), Scott McGregor (Broadcom) and Nicky Lu (Etron) and investors Andy Rappaport (August Capital), John Doerr (Kleiner Perkins Caufield and Byers), and Dado Banatao (Tallwood Venture Capital).

Rappaport!who helped start companies such as Atheros, Silicon Image, SuVolta, and Transmeta!kicked off the discussion with a frank assessment of what he called the semiconductor innovation gap:

The history of the semiconductor industry is the history of innovation through start-ups, but we are entering a new era. A steady flow of VC-financed, US-based and funded start-ups has slowed to a trickle. In 2012 and 2013 no one is even keeping the data anymore because the numbers are so small.

Semiconductor start-ups have been terrible investments. After 2011 they have not recovered anything close to 100 per cent of the capital invested. Today if you invest in semiconductors you have a 50 per cent chance of losing 60 per cent of your money!it's hard to get up in the morning. Somehow you have to get paid for risk and we haven't been paid for it.

Start-ups got expensive in part due to the cost of masks. The most interesting problems are very complicated and complexity is expensive!verification is the biggest expense. Cheap things don't create enough value for start-ups to differentiate themselves, and it's harder these days to take big companies by surprise given the complexity of delivering new products.

There will not be a robust pipeline of start-ups ever again, so innovation has to come from other places. One challenge is to figure out how to harness the resources of large corporations.

Consolidation ahead
Several panelists argued the maturing semiconductor industry will consolidate into a few larger companies building fewer, larger chips. McGregor of Broadcom agreed there is a change ahead, but said the picture is not dire:

We are a consumer of semiconductor start-ups. We buy on average one or two companies per quarter!50 in the last 10 years.

Development costs per chip have gone from a few million to $30 to $40 million for a 28nm chip. That's not a good budget for a VC, and God help you if you have to re-spin the chip.

That said, the number of chips in a box used to be higher. A set top today is almost all air inside because customers perceive value in the size of the box. It's pretty much one chip in a set top these days, and it usually has our logo on it.

So the number of chips is coming down, and therefore the number of semiconductor companies ought to come down. We don't want to stop seeing start-ups, but there's a lot of M&A between companies that also creates value and a broad IP set.

T.J. Rodgers of Cypress noted his company has spawned internal start-ups such as solar company SunPower which had a $2.6 billion IPO and Cypress' Programmable SoC (PSoC) group which generates $400 million in revenue:

Internal start-ups help avoid hardening of the arteries in a big company. We started 14 companies and two have been big winners.

PSoC is our newest method for attracting smart people by offering them a clear path to silicon success. It's basically an ARM M0 controller with all the peripherals on board and a blank space that says, "Your IP here." So they don't have to worry about working with TSMC.

Today the cost of a chip can be more than a fab was when we got started. We spent $95 million on PSoC 3. That filters out a lot of VCs.

VCs are out of fabs, and that's OK... The world is better off with another Google or LinkedIn rather than another fab somewhere. It's the right thing to spend VC money more economically in the US.

Of 59 companies ahead of us when Cypress started, only 19 in the US are left. So it's going to be a smaller industry.

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