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VCs-believe-in-Semiconductor
Sanjeev Jain
Monday, November 17, 2008
Rajiv Laroia has never had it this good. Around August last year, Qualcomm announced the acquisition of his company Flarion and by January this year, Flarion went into Qualcomm’s fold for $600 million.

Laroia has laughed his way to the bank with the VCs backing him. Thomas L. Rosch, general partner at InterWest Partners says, “I can see the semiconductor industry coming back on its toes. The year 2005 was marked by successful deals and lot of early stage financing.” Rich Redelfs, Managing Partner at Foundation Capital echoes similar sentiments. “Semiconductor Industry has seen a lot of activity. It’s been a robust year for both the VCs and entrepreneurs.”

However, Sumant Mandal, Managing Partner at Clearstone Venture Partners says, “Semiconductor is a cyclical industry and funding is not as good as it was two years ago.” He is probably right. In 104 deals so far this year, VCs invested $1.044 billion while they invested $1.833 billion in this space in 2005, the report says. Mandal quips, “ Not a big deal. In 2005, it did not see much activity as most players got funded before 2005. The next wave of big time investment is a year away, perhaps two-three years away.”

Given the high cost of investment involved in new semiconductor ventures, Rosch believes it to have ebbed the excitement in VCs who would rather wait and see their portfolio companies go public or get acquired, before making new investments.

Mandal says over the last few years, most new investment in the semiconductor segment has gone into networking and that area in general has not seen much iteration as it did some years ago. With its saturation, VCs don’t find any interest to invest in this sector. “The venture capitalist has become cautious now. Why will he continue investing in companies that are building the same products all over. He would rather wait for a good exit opportunity,” says Mandal.

Newer Themes
The primary aspect of semiconductor business is to make more functions available at a cheaper rate and target the mass market. This calls for innovation and startups that innovate can reverse fortunes in their favor. “Semiconductor, unless not targeted at the massive consumer base, is not a profitable venture,” Mandal adds. Given that segments like developing computer chips require massive capital infusion, VCs say startups should stay away from this industry. But there are plenty of opportunities in pockets like communication and broadcasting, digital media, RF, WiMax and WiFi that VCs believe are interesting technologies of 2006.

Today, with massive increase in the number of hand phones globally, particularly Asia, Africa and South America, consumers are demanding more features to their handsets. They want to watch live and taped television broadcasts on their hand phones, they want compression technology to save more data and more rich digital applications in their handsets. Today many companies are centered on this sector but VCs say, there’s room for more as long as cutting edge technology is being developed. The VCs are also watching some of the 801.11 companies integrating technologies like Bluetooth to provide capabilities inside one chip aimed at the handset market.

Digital television and set-top box market segments for the semiconductor industry is expected to remain top in 2006 as access players begin to look for companies in digital video to develop products for internet protocol (IP) set-top box applications. Redelfs believes that if companies are developing technology for broadcast TV, Cable, Internet video, they are sure to attract VC attention. “Of late consumer electronic companies have started doing well. There’s renewed interest in electronics after a period of lull and it’s time consumer electronic companies showcase their products,” says Mandal.

Another segment VCs are eyeing is the analog design segment. “If you are looking at next generation analog technology look at the 10gbps technology in which only a few companies are present. It’s the best time to be in analog space,” says Rosch. For both Mandal and Rosch, power management and programmable analog is something that excites them.

Make It Right
“True like any other business, semiconductor business also means you can be successful if you see a big market, know your industry well, have a different technology to show, backing of a great team and show a business model that makes sense,” Redelfs says.

“During the bust period, semiconductor companies were the ones to be hit last and will be ones to pick up last. To be successful in semiconductor industry, you need evolutionary technology and not revolutionary technology,” says Mandal. He says people are still trying to accrue what is the best market to be in. “You just can’t produce a product and say hey I want people to buy that,” says Rosch. He says don’t jump into the industry telling people I have this great product. Make sure the product you want to sell has the potential to challenge the available thing in the market. Today if you are building a semiconductor company, part of the innovation is in semiconductor and part of the innovation is software.

Exit, IPO or M&A
“Exit has become more difficult then they were some years ago not just for semiconductor companies but also for startups,” Redelfs adds. With the advent of SoX and other regulatory requirements and with more market demands for sustainable profitability, IPO exit has become more difficult leading to more M&A activity. Global acquisition is a continuation of the trend that started last year. In 2005, about 58 deals closed, up from 54 in 2004 and 56 in 2003. Although the number has remained nearly flat, the medium size financial transaction has doubled. “It’s a buyers market out there and they have become choosers. They can dictate the price at which they can buy companies. But we will see successful IPOs in the next 12 months,” believes Rosch.
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