Out Of The Cradle
Date: Friday , February 28, 2003
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.
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.
“Under Suhas’ guidance we had started the development of a technology,” says Satish Gupta, who eventually co-founded Cradle. It was a bold new development, which required substantial additional investment. But soon, Cirrus Logic’s focus narrowed on high-margin chip solutions, and Patil’s concept—originally destined to be a Cirrus product—was spun-off to create Cradle Technologies.
At Cradle, Patil and Gupta decided to rewrite the rules of chip design. Their trump card was a semiconductor-software hybrid. The company developed a parallel-processor-based ASIC, which would enable chip manufacturers to create new applications by writing new software for the processors rather than building a chip from scratch. This product would eventually reduce the number of engineers required to design a chip.
Building such a revolutionary technology doesn’t happen overnight. For five years, Gupta and his team toiled at their drawing boards with all their energies going into building the technology. “It’s an idea that several other tech names have found compelling, but it’s still a pretty revolutionary technology,” says Markus Levy, an analyst with Instat/MDR and president of the Embedded Microprocessor Benchmarking Consortium.
A New Face
The company also needed additional capital and experienced professionals in order to take it to the next stage. Charter Ventures, which had already participated in two earlier rounds, showed interest. Arthur Chang, then entrepreneur-in-residence at Charter, was asked to do the due diligence and evaluate Cradle. “It was a Saturday morning. The scheduled one-hour meeting eventually finished after nine grueling hours of brainstorming,” recalls Chang. “We went over all the aspects: product, marketing, market, financials and management. For the next six weeks, I was busy with the due diligence process. In the end, it turned out to be a synthesis of a new partnership.” The founders asked him to come on board, so that it became easier to raise the necessary capital.
“When a new person [Chang] comes into the company, everybody is anxious to see what happens. It is imperative that the new person comes in with the same excitement, passion and commitment to the cause. This is exactly what happened with us,” says Gupta, who made way for Chang as CEO.
This is not the first time Chang is taking a company to its next level. Having done it twice before, he knows the issues involved in a company’s transition phase. “When you are in the R&D phase, you are an inwardly focused company. There are generally few external uncontrolled parameters that you have to worry about. You raise money, put the team together, and basically execute R&D. When you transition to a revenue growth phase, you become very outwardly focused. The growth is dependent on external parameters such as customers, industry analysts, and sales partners,” explains Chang, “So it is a very challenging transition from an inwardly focused company to an outwardly focused company. And to manage that transition, you need someone who has been through it.”
Chang’s first priority was to get the company stable from the financial point of view. He helped the founders in raising $11 million in its recent funding round.
Chang spent a significant amount of time restructuring the marketing message. Prior to his arrival, the company said they were building a Universal Micro System (UMS) platform. “Well, the architecture may be that,” says Chang, “but a small company with not much capital had a very difficult time getting that message across to customers and winning customer designs.” Today, none of the Cradle employees talk about UMS—a misnomer according to Chang. Cradle’s architecture is now marketed as “Software Scalable System-on-a-Chip (3SoC),” through which Chang believes to deliver compelling value to customers.
And this meant building specific products for specific markets and specific customers. Cradle had gone after every market segment. “The company tried to do too many things without having the capital resources,” remarks Chang. It was his obligation to bring in a very strong market focus. Just three days after walking into his new office, Chang went around the world and talked to all the potential customers and decided to focus on two specific market segments: media processing and communications. “As we develop our domain expertise and derive sustainable revenues from these two market segments, we will move to additional market segments. For the time being, development and resources allocated to other extraneous markets will be pulled off,” says Chang.
Chang elaborates on his decision to focus on these two segments. “The software scalable SoC architecture that Cradle has built lends itself extremely well to the communication and media processing space. In these two segments, parallel streams of data or video need to be processed on a real-time basis. DSP processing has its limitations, which is overcome by our architecture,” he explains. “Also, the two segments are large and still growing, which talks about the opportunity.”
Cradle does not have any real customers as yet, though it was engaging with a number of potential customers, most of them in China, Taiwan and Japan. Chang and Prakash are aggressively moving towards establishing the initial customer base. “We should be able to do this very shortly,” says Chang, “The product is being sampled by several customers and Cradle expects to start generating significant revenue in six to 12 months.”
If recent developments at Cradle are any indicator, Gupta’s stepping down as CEO has only helped the company. However, Gupta’s efforts over the last five years should not be forgotten. It was he who nurtured the company and developed the technology. But one question remains: is Gupta a true entrepreneur? “I don’t think that entrepreneurs and founders necessarily have to be the same. Nor do they have to be necessarily different,” says Chang. “Entrepreneurship is a selfless endeavor towards the vision. A true entrepreneur would be ready to step down. It is a good gesture and the right thing to do. The cause is more important than the position,” adds Gupta.
“One of the most important ingredients in being a good entrepreneur is to know at what position within the company one can deliver his maximum. One should not have any preconceived notions that he has to hold a particular title. It is a great attribute of Satish to step down. He came to realize that his position, as CEO, in this phase of the company, was not appropriate. He knew where he could be of maximum benefit to the company,” says Chang, “This is the litmus test of the great entrepreneur. They are able to move around and not necessarily be stuck in a particular position.”
“It so happens that my strengths right now match up very well with the CEO position for the company in this phase of its growth,” says Chang. But does he have the same passion as that of the founders? Gupta agrees that no other person will have the same passion as the founders. “But it is not quantifiable. Passion is an infectious phenomenon,” he says. “Have you met Artie [Chang]?”