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Can we afford for startups to wind down?

Next week, I am on a DAC financial panel "Can We Afford for Startups to Wind Down?" Here’s a preview of my position.

We can only afford for startups to wind down if -

  • The need for innovation in electronic design has gone away because semiconductor companies are humming along just fine, OR
  • An alternative model/source of innovation has been discovered

Now, looking at the exponential increase in the design cost of semiconductors, it is foolish to believe that there is no longer a need for innovation. At the same time, the funding model for this innovation is under huge stress. IMO there is a mismatch between the money available and the investment opportunities, creating what might be perceived as a funding crisis if Sandhill VC is your sole benchmark. Following is one simplified view of the EDA innovation and the kind of investment that should pursue it -

  • New platform creation. Typically, this happens at the edges of an existing platform (at least in EDA). One of the mistakes we can make is in under-funding the creation of platforms because you are asking the customers to move to a whole new methodology, but they are only going to do it if the platform is complete. Leaving big gaps like "availability of models/libraries" can often render a promising platform useless. You could make the case that adoption of ESL has been slower partially because the IP models are the missing ingredients to truly move to the next abstraction level or to be effective for architectural exploration. "New" platforms typically need a lot of investment and there can be huge value in "owning" the platform. VCs have provided source of financing and IPO can be a probable exit.
  • Provide components to a significantly growing platform. This is where lots of EDA startups have flourished since the last big disruption of synthesis. They provided point tools. The platform owners were growing and could afford to pay big premiums to improve parts of the flow or add to them. M&A was the typical exit and, as long as the startups stayed very focused on providing these point tools and kept their finances under control, there was a reasonable return possible for 5-10M in investments even for the venture asset class.
  • Improve components for mature platforms. This is the trap startups have been in for the last few years. Big companies can’t afford to pay 10x revenue multiples since the ROI could not be justified in this environment when they themselves were only getting a 2-3x revenue multiple. If you also consider that most of the funds got too big during the bubble, a natural funding vacuum was created while the need for innovation hasn't gone away.

So, what are the options for startups in this environment -

  • Invest in "new" platforms. In post financial collapse, hopefully, there would be small to mid-size funds again interested in these high return opportunities.
  • A new funding model and new operating model needs to emerge for companies which can provide room for innovation such that entrepreneurs can still get decent upside in 10-15M exits rather than 50M+. I personal believe addressing the cost of channel is key to creating opportunities in this segment.
  • Bootstrapping is something Denali is familiar with. Of course, improving pieces of existing platform means you don’t need to invest in evangelizing a new platform. I believe there are lots of opportunities, at least in IP, where completely bootstrapped companies can and do succeed.


I hope to get your feedback in preparation for the next week’s panel! PANEL: Town Hall Meeting: Can We Afford for Start-Ups to Wind Down? TUESDAY July 28, 2:15pm - 3:15pm, DAC Pavilion (Booth #1928)

Chair: Lucio Lanza - Lanza Tech Ventures, Palo Alto, CA

Speakers:
• Shishpal Rawat - Intel Capital, Santa Clara, CA
• Gunjeet Baweja - Needham & Company, LLC, Menlo Park, CA
• Sanjay Srivastava - Denali Software, Inc., Sunnyvale , CA

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Comment by Sanjay Srivastava on July 25, 2009 at 8:47pm
Sean,

Agreed. Oasys is probably the most eagerly anticipated company of this DAC and certainly doesn't fit the investment categories in my blog. But at this stage it is unclear to at least me who provided the investment and with what expectation of return. In either bootstrapped or VC funded case, four or five development cycle pre-announcement is certainly unusual.
Comment by Sean Murphy on July 25, 2009 at 3:15pm
One data point for your talk is Oasys which has built their product over the last four years with a combination of self-funding, angels, and early customers, but no Venture Capital. They don't fit into one of your three categories--to the extent that I understand them from your brief description--in that they aim to be a form/fit/function replacement for Design Compiler. They violate Gordon Bell's precept of "avoid attacking walled cities" (avoid taking on an established competitor directly in their market) from "High Tech Ventures" It sounds like it will be an interesting panel.

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