In search of new chip startup funding models

by Dylan McGrath , TechOnline India - December 08, 2011

The fact of the matter is that bringing a chip to market, even for a fabless company, has become an ultra-expensive proposition.

We've heard it so many times, by now it sounds like a broken record: venture capitalists, long the lifeblood nurturing a thriving community of semiconductor startups, have all but abandoned the chip industry, turning instead to social media and green energy technologies, where the common wisdom is a smaller investment can go a lot further.

We've heard many times, too, that its hard to blame them. The fact of the matter is that bringing a chip to market, even for a fabless company, has become an ultra-expensive proposition requiring on the order of $30 million or more. And we've also heard plenty about what a dangerous situation this is for the semiconductor industry, which has practically since it began depended on the innovation brought by small start ups to thrive.

What we haven't heard much about is what, if anything, can be done about that.

But for about year a working group within the Global Semiconductor Alliance organization has been quietly meeting to discuss this topic, gradually putting momentum around a proposal to develop a $100 million angel fund with a VC fund legal structure to invest strictly in semiconductor firms.

"I think it's really starting to gain some steam with people in the industry," said Ralph Schmitt, chairman of the GSA's Emerging Company CEO Council. Schmitt, who is also president and CEO of chip maker PLX Technology Inc., said the council's Capital Lite Working Group meets once a month and that attendance at these meetings has been growing exponentially.

The group's stated mission is to develop, promote and execute alternative investment models that can be used by chip startups to innovate and prosper. The hope is to get support from a consortium of firms through the entire semiconductor ecosystem.   

"Fundamentally, the model has to change," Schmitt said. "The guys that need this innovation need to get more involved. Frankly, the VCs need to take a bit of a back seat."

The fund that the group is trying to develop would be supported by large and mid-sized chip companies, suppliers and service partners. The fund would only invest in startups that have the "sponsorship" of a strategic investor or OEM and would limit its exposure to less than $10 million per company. The startups the fund supports would be modeled to be acquired by their strategic sponsor or another firm.

"We are very much focused on tangible results," Schmitt said. He said the group believes it should be able to get between one and three new startups funded within the next six months in its initial foray.

One way Schmitt envisions greasing the wheels of innovation is by providing startups with a tool kit of resources from the supporting companies to try to minimize the costs of the startups.

Schmitt estimates that only about half a dozen VC firms are still involved in funding chip companies, including Tallwood Venture Capital, Walden International and U.S. Venture Partners, all of which have been involved with the Capital Lite Working Group. Schmitt is one of many people in the semiconductor industry that believes the glory days of depending on VCs to incubate chip companies are gone forever.

Of course, many chip companies already make strategic investments in a number of firms. The notable deep-pocketed example of this in Intel Corp., which maintains its own venture capital arm to back firms from the semiconductor industry and, increasingly, beyond. Schmitt said the Capital Lite Working Group is in the early stages of trying to get Intel involved with the program.

Schmitt acknowledges that there is no guarantee that the working group will directly benefit his firm or any of the others involved. But he and others believe that a bubbling pool of startup activity and innovation is crucial to the long-term health of the semiconductor industry.

"This industry has always historically banded together when there are model changes," Schmitt said, noting that when the fabless chip firm model emerged, companies banded together to pool resources through organizations like the GSA (originally known as the Fabless Semiconductor Association).

The jury is out on whether the Capital Lite Working Group can pull together the fund and whether it will create a sustainable model that can support chip startup innovation going forward. But it's a critical issue that is on a lot of people's minds, and it's nice to see someone is at least talking about a solution.

For more information, please see the VC Watch section of the November issue of EE Times Confidential.

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