CRADLE IS TAKING A BOLD STEP IN SEMI-conductor design in it’s approach to transform the chip-design process by using a software-scalable chip. To date, it has raised $52 million, the most recent injection of funds being a $11 million fifth round which, incidentally, is less than its previous round of $20 million. When the company announced its latest round of funding, there were speculations that the company’s valuation had fallen since its inception. But Cradle was granted a fresh lease on life.

While a down round such as this is a disconcerting experience, it may also lead to positive results—and this is precisely what Cradle has achieved. The company founders and its shareholders opted to reduce Cradle’s five classes of preferred equity into two. The $11 million round was called a Series B-1 funding. It followed four rounds of investment totaling $41 million—all of which were referred to as the A-1 round. This “recapitalization” ended up simplifying the entire capital structure of the company.

“We wanted to scale the company with the next round—we didn’t want to be going for our sixth or seventh rounds to become cash-flow positive. In the venture world, if you have six classes of equity, it is a very difficult thing. Few VCs will invest in a sixth or seventh round, so the idea was to reposition the company so that it could attract still more investment if necessary,” explains Charter Ventures partner Bob Kondamoori, who led the latest round and has invested in the company in the last three rounds. “Every time you get a new round of funding, you invariably have to spend $250,000 for legal fees and close the deal in four months. By recapitalizing, we could save in the future in terms of legal fees,” he reasons.

The capital structuring had one unexpected benefit. The company avoided the stigma of some re-caps; by contrast, its previous valuation was so out of touch with the current market that investors said they would put in money only if there was a clean slate in terms of stock ownership. The recapitalization also brought a sharper focus to the company’s business model. Despite the fall in Cradle’s valuation, the investors from the first four rounds retained significant ownership of the company.

The Spin-off
For years, Suhas Patil, Cirrus Logic founder, had noticed the hardships of designing chips and wondered if there were newer ways of realizing chips. For Patil, an industry veteran who pioneered the birth of the fabless semiconductor industry, it was still in the early stages to think of some revolutionary idea. But he was confident that the shift to software would eventually come into effect.