Industry Squibs

We reported earlier this year that 2008 was anything but a stellar start in terms of venture capital for semiconductor startups. It does not take a genius to see that the semiconductor market has been on shaky ground as of late, excluding a couple companies here and there. Nevertheless, running across two articles that highlight the negative and are published on the same day, while addressing the opposite sides of the semiconductor spectrum, is rather depressing.

The first article, titled Why Chip Stocks are Down and written by Steve Tobak, focuses on established semiconductor companies and examines why they have significantly underperformed the market over the last few years even though chip sales have experienced double-digit growth over the same period. According to Steve, some of the lackluster performance can be explained by the recent memory chip glut. Additionally, the dot-com bust which inflated the stock prices of more than one semiconductor company still rears its ugly head to some degree. And while an in-depth analysis of the entire sector is sort of lacking in the article, one observation regarding companies that bucked the trend is quite enlightening: “Proprietary products in hot markets resist negative sector trends, while commodities suffer the most.” This observation is exemplified by companies such as Qualcomm and Marvel who have done rather well for themselves. Interestingly, nVidia did quite well over the same time period too, while Intel stayed about flat - One would think that the fortunes of these two companies would be in lock-step, but this turns out not to be the case at least as far as stock valuation is concerned.

The second article is a commentary by Chris Fisher titled What Price Entrepreneurship? Essentially, the article questions whether starting or joining a semiconductor startup makes sense from an individual’s financial point of view. Chris estimates that a semiconductor startup needs to raise in-between $60 and $120 million these days. Money alone of course does not guarantee that the company will be successful – Montalvo comes to mind as a recent example. Now, if getting this much money was not difficult enough, Chris points out that public markets recently have valued semiconductor companies on the low side at about three times revenues. Add to this the dismal performance of semiconductor IPOs as of late, a lack of interest by established companies in acquiring new ones, and one has to wonder if time spent on a semiconductor startup is time well spent. Of course, if money is your most important objective, then Web 2.0 and related startups which usually require significantly less startup capital might be a better option at this point. Although from my experience, many semiconductor aficionados will very much cringe at the idea of writing code all day or having to sit through code reviews.

A few weeks ago Nick Tredennick published a rather interesting analysis of the current state of the semiconductor market, titled Computing in Transition. Now why would you care about what Nick has to say about computing? Well, let’s say he has been around the block a few times. He worked on microcontrollers for Motorola in the late 70s, and then worked on the design of the Micro/370 microprocessor at IBM in the eighties before becoming the director of product development at Nexgen, followed by a quick stint as the chief scientists at Altera in the 90s. Currently he holds the president post at Tredennick Inc., a company specializing in consulting for full-custom and semi-custom VLSI designs. And if this were not enough, he also is an editor for the Glider Technology Report. As you see, when Nick publishes a presentation it is probably worth reviewing to get a viewpoint from an industry veteran.

In his latest presentation the premise is that the microprocessor in essence stalled innovation in logic design since it allowed programming to become a substitute for logic design. This held true as long as the design goal was defined by cost-performance. However, more recently with the introduction of power constraints the design goal has been modified to be cost-performance per watt, leading to multi-core chips. As such, the computing market is in a transitional phase, however, where exactly it is heading is rather hard to predict. What might help therefore is an analysis of where the industry has been and where it is now.

Here Nick digs up some very interesting facts and charts: For example, while it seems that companies are shipping millions of chips yearly, the semiconductor market accounts for less than one percent of the gross world product (GWP). At least the semiconductor market is growing at about twice the rate of the GWP. How is this for another interesting prediction: Unlike technology pundits who like to predict future killer applications that will take the market by storm, Nick has a rather simple prediction: there will be no such application. A couple other things get cleared up as well: First, Motorola destroyed Four-Phase Systems leaving Intel to dominate the microprocessor market and Altera is older than Xilinx. On the more serious side, Nick does a great job breaking down the current market into different segments, Microprocessors, ASICs, FPGA, etc. He then also dissects the market based on design goals: zero cost, zero power, zero delay, and zero volume.  These two approaches are then used in turn to analyze where some of the current products fall. But that’s not all, more analysis follows taking into consideration transistor scaling, yield implications, processor complexity and design effort. Eventually, Nick arrives at the prediction that reconfigurable hardware might well be the answer to optimizing future designs for the particular function they are to implement at a particular point in time. How exactly he gets to this conclusion is best understood by reading his presentation. One more thing, the presentation is almost 40 pages long, so you better grab a coffee and a comfortable chair.

We’ve been writing a lot about startup companies as of late, so it is about time that we take a look at the state of venture capital fundraising and venture-backed exits activity. Today, the National Venture Capital Association (NVCA) released their report for the first quarter of 2008.  In short, the findings show that Q1 of 2008 saw a 31% decrease in fundraising as compared to the same period in 2007. A possible reason for the slowdown might be that many of the top firms raised significant capital over the last few years. Particular low for the first quarter was the number of new funds as compared to follow-on funds, yielding a follow-on to new fund ratio close to 10, whereas Q1 2007 came in at about 3. The NVCA also reported a gloomy picture with respect to venture-backed exits for the first quarter of 2008 earlier this month, with IPOs at the lowest volume level since 2003, and acquisitions at the lowest level in about a decade. The Life Sciences sector dominated the IPO activity with four exits, while information technology came in a distant second with only one. Needless to say, no semiconductor IPO exits occurred during this period. The merger and acquisition side of things saw a total of 56 deals, with computer software and internet specific deals accounting for close to half of these. There were four deals listed in the semiconductor/other electronics category, however the actual companies were not disclosed. As expected, the lackluster start to the year is blamed on the uncertain economic climate in the U.S. Overall, these results so far mostly agree with the NVCA predictions for 2008 which we discussed here.