Funding Fabless Semiconductor Startups
Here is something which we hear repeated often -
It costs 50-60M to fund a fabless semiconductor startup which means that there are very few opportunities to fund a semi startup.
I am sure the numbers have some element of truth to them. I asked the following question internally of my team -
Let’s say all the IP blocks were ready to go, and high quality verification IP were available for all interfaces, how much would it cost to build a fully-verified design for a chip with moderate complexity – ARM core, multiport DDR controller, PCIe controller, and mutiple channels of flash controller?
The estimate was in low single digit engineer-years. Say, with a fully loaded cost of 250K/yr, that is less than a million dollars! Here are some other costs -
- Development of differentiating IP
- IP acquisition cost, backend services (1-3M)
- Mask cost (say 500K for 90nm, < 1M for 65)
If you add up all the costs, you can get a chip delivered with say core IP development cost plus another 3-4M.
Now, where does the $50M number come from? I am assuming this number represents a VC’s expectation on amount of investment that would need to be made to take a product from initial design through volume production. There are a lot of costs which a startup would need to incur which are not listed above -
- Overhead – finance, management, sales, etc
- Course correction – it is very seldom that the original plan does not need to be adjusted to respond to a market condition.
- Reference design – this often carries a huge software development investment and can be a big expense if marketing needs a working prototype for tradeshows and customer engagements. You can often lose an entire generation of a chip while the reference design is being built.
- Pace of market development – As Paul Mclellan posted recently, startups are often too early to the market, not too late. Semis can be perishable commodity. Process shrink, change in interfaces, etc could mean that a chip that does not ship in volume right away might not ship at all before the next generation is delivered. That means all the mask cost, NRE, bringup cost, is all wasted.
I believe an investment model can and should emerge which addresses some of these anomalies -
- Need to make sure that a larger portion of investment and management focus goes into the “core”. Some sort of investment sharing along the lines of what Paul Slaby calls semi-fabless semiconductor model could be an interesting answer.
- “Staged” investment where the component with longer shelf life (i.e., differentiating IP) is invested with different financial risk-reward profile than the silicon itself. Former would mitigate technology risk, latter needs to be all about managing market risk. Most investments in fabless semis don’t work that way today.
- Just like we all accept 50 million dollar silicon cost as the final truth, here’s another: software development costs are skyrocketing. In order to make the sale, semis are expected to provide reference designs which include full software implementations. Semiconductor business success is all about shipping in volume because of the high NRE. The top-100 OEMs consume 70% of all semiconductors. A lot of these OEMs don’t even use the software from the semis but develop their own software as their differentiators. So, all that initial software investment by the semis is a) often impossible to monetize, and b) doesn’t even get used beyond tradeshows and sales demos. Needless to say, in a financially constrained environment, something needs to change.
I believe if we get creative about the current fabless investment model, not every semiconductor oppourtunity needs to be a billion dollar opportunity before it can attract meaningful investment.
Great Post, Sanjay. I would like to understand your comment about software a little better.
Ajay Bharadwaj
September 25, 2009 at 5:43 am
The list has shrunk, but there is still a strong contingency of chip start-ups, and they seem to wanting to grow their staff. This is very up-to-date, and feel free to add your company if you would like.
http://www.chipcareers.com/semiconductor-start-ups.htm
Robert Green
March 18, 2010 at 11:22 am
[...] argues (in Funding Fabless Semiconductor Startups) that solutions need to look at how and where money is invested, how we “stage” investments [...]
Numetrics - Fabless semiconductor companies need new differentiation
May 19, 2010 at 4:27 pm
Clearly the model where your project is just an aggregation of third party IP blocks is not a very interesting investment as it would create no defendable position in the market place. So from a differentiation point of view early stage chip companies need to have some unique IP. And this IP needs to be substantial thus creates the people and tool cost that makes chip design expensive. Secondly, to differentiate on performance, power, or space you have to be at least closer to the leading edge. When Intel is at 32nm, don’t pick 90nm as a feasible technology. So mask costs are measured in the millions for products that try to compete in high-value silicon. Thirdly, it takes at least two product cycles to move the value chain. Dell doesn’t move until it can sell 100k units a month, and ISVs don’t move until there millions of units of installed base. So the source of the $50M needed for fabless semi is that creating new IP is a $20-25M problem if presented to the market as a chip and it takes two cycles to move the supply chain.
The market dynamics of IT has created this situation. It used to be the case that the enterprise market drove silicon innovation. However, the enterprise market is now dragging the silicon investment market down. Enterprise hardware and software is no longer innovating: the innovation is now driven by the consumer market. And that game is played and controlled by the high volume OEMs. Secondly, their cost constraints and margins make delivering IP to these OEMs very unattractive: they hold all the cards and attenuate pricing so that continued engineering innovation is hard to sustain. An OEM is not interested in creating unique IP by a third party: it would deleverage them. So you end up getting only the non-differentiable pieces of technology and a race to the bottom.
Personally, I believe that there is a third wave of silicon innovation brewing. When I calculate the efficiency that Intel gets out of a square millimeter of silicon and compare that to what is possible I see a thousand fold difference. So, there are tremendous innovation possibilities from an efficiency point of view alone. Combining it with the trend to put intelligence into every widget and connecting them wirelessly provides the application space where efficient silicon that delivers high performance per Watt. Mixed-signal and new processor architectures will be the differentiators and the capital markets will at one point recognize the tremendous opportunities present to create a next generation platform that creates these intelligent platforms.
Until then, us folks that are pushing the envelope will continue to refine our technologies so we can be ready when the capital market catches up with the opportunities.
Theodore Omtzigt
June 20, 2010 at 7:19 am
Hi,
I am looking for information on royalty rates for fabless start ups. Any good website/resource I can utilize?
Willing to $$$
Karthik
April 5, 2012 at 7:39 am