Diary of a Geek VC

Semiconductor Sector Commentary

Mon, 19 Jul 2010 13:29:59 -0400

I am a member of the Global Semiconductor Association (GSA) and was asked to write a commentary on the current state of VC funding of the sector for their June 2010 newsletter. If you are a startup or established company in the semiconductor ecosystem, you should absolutely join the GSA, as the member benefits including industry data and networking are priceless.

Here is my piece:

Looking at 2010 as an optimist, the semiconductor sector is coming back. Public companies’ earnings are up, excess fab
capacity has dwindled and, finally, we have seen a return of the IPO market, with four in the air already and eight others
on the tarmac awaiting liftoff. And GSA reports that in the first six months of 2010, 78 semiconductor funding deals were valued at approximately $800 million, a respectable 42% increase over the same period in 2009.

But beneath this high-level news is data that continues to be discouraging to entrepreneurs and early-stage investors (like yours truly) who are seeking to fund them. Of the companies funded in 1H 2010, only four look like de novo start-ups, meaning that the remaining are running companies raising follow-on rounds. So we’re still in a drought for venture-funded start-up semiconductor companies. As one of the few, but proud, investors targeting this sector, I think I have an explanation as to why.

First, there is a supply problem. We’re not seeing enough innovative ideas. Innovation doesn’t only mean focusing on new markets such as solar, LEDs and sensors. Personally, I am a huge fan of taking on complacent incumbents by reinventing vectors where they have reached technology or business model barriers. I invite entrepreneurs to reach out and describe why a big portion of their favorite, large public semiconductor company’s business is ripe for the taking.

Second, there is a business model problem. It is very expensive for a semiconductor company to reach “standalone status.” If it takes nearly $100 million in capital to finance company XYZ and breakeven, and the market for acquisition of said company ranges from $75 to $100 million, the equation doesn’t solve. So in addition to closing the gap, entrepreneurs need to be able to demonstrate how they can effectively operate on fewer dollars. I have seen and funded several different companies in the past few years that have done this in a few different ways: utilizing older geometries and cheaper materials, being a player in the microelectromechanical systems (MEMS) and analog/mixed-signal markets, and leveraging third-party technology. And I am sure there are others.

Third, there is a venture capital problem. There are too few VCs interested in funding semiconductor companies. The
returns have been terrible across all venture-funded sectors; however, to be blunt, semiconductors have created deeper
holes than others. Semiconductor investment is harder than software investment because it adds complex manufacturing
issues to many of the same risks faced by software companies such as reliability, customer concentration and intensity of incumbent power. Combine poor outcomes with huge capital losses and complicated technology that is often hard to get right the first time and you will lose investors – even the bold ones.

However, I see tremendous opportunity for entrepreneurs and VCs ready to take the leap. The semiconductor industry
may very well be at a discontinuous moment, but it is also the very best time to start new competition. Incumbents have underinvested because of the great recession of 2009, and many of them are overconfident about their clout with
customers. Matched with the maturity of the fabless value chain, customers are far less reluctant to work with start-ups. Gaps and new markets exist, engineers and business talent are eager for new challenges, and the best ideas, no matter how seemingly cold a market, always get funded. So let’s be optimists!

NY Video Meetup May 10

Thu, 13 May 2010 16:56:04 -0400

I helped judge a panel American Idol-style Monday night at the monthly NY Video Meetup. Six great startups in the video space, but the standouts to me were SundaySky and Interlude.

SundaySky has a platform that automatically creates context relevant videos based on policies that can be very valuable for commerce businesses (and I hear are already demonstrating this!) My pal Jonathan Seelig is a lead investor and I was really impressed with the potential. I still don’t understand how they can keep the automation high and up-front integration low.

Interlude is the brainchild of Israeli pop star Yoni Bloch and provides a platform to help turn videos into real time engaging stories/games. Yoni showed a video of Interlude in action and it appears near the end of the video of the evening’s festivities. Very cool - FWIW, the song is called “Unnamed” and you cannot yet find it on iTunes. Yoni mentioned there is lots of interest in licensing the Interlude platform.

A link to the recording of the May 10th event is found by clicking here.

iPad Impressions

Mon, 5 Apr 2010 13:54:41 -0400

Amazing.

I know there has already been and will be more written about the iPad; some will love it, some will hate it. I am in the former category from two different perspectives as both a user and investor

As a User

As usual, the Apple out-of-box experience was tremendous. The packaging is terrific - gorgeous and simple simultaneously. Having been accustomed to the iPod/iPhone/iTunes process for a few years, it was a cinch connecting the iPad to a Mac via USB and magically all my iPhone apps were available to download.

I had read about several free and paid apps specific to the iPad and got them:
• the Apple iWork trio (Numbers, Pages and Keynote),
• Things (I am a to-do list junkie)
• LogMeIn (nicely done)
• Wall Street Journal (I am ditching the paper for good)
• MLB At Bat (Awesome augmented reality app for the baseball fans out there)
• Marvel Comics (with a shout-out to my friends at Comixology, this is a great showcase app)
• Photos (best way to use iPhoto yet)

All the early reviews commented on the native mail, contacts and calendar applications and they are as good as promised.

Several other apps are still iPod/iPhone versions and although the backward compatibility is tremendous, the iPad native versions are so much better at taking advantage of the screen size.

The startup time of applications is impressive - it’s instantaneous. Makes me wonder why we have accepted bloatware on PCs and Macs for so long.

Annoyances? Really not too many. I am getting quickly proficient at typing on the virtual keyboard - and given the size of it in landscape mode, it works great with my fat fingers.

Wishes? I wish there was a camera, tethering to my iPhone, a native USB jack and the equivalent of the COMMAND-TAB sequence to quickly cycle through open applications. And I wish that the native iWork apps allowed export to their MS equivalents.

Questions? I cannot decide yet if the opaqueness of the file system is a good or bad thing. On the one hand, matching documents with the applications makes it simple to avoid duplicates clogging a drive, and keep accidental deletions to a minimum. But when I have many documents on the device, I can see where the inability to organize folders will be a pain - searching serially for a doc even in coverflow-like scrolling, will be a pain.

As a Student of Business Models

This is awesome. Finally a way to thwart (at least for the time being) software piracy - even the casual type among friends that has plagued the industry forever. Make the software cheap enough such that everyone will buy it and won’t mind too much that they can’t just copy their friend’s version easily.

Embedding usage measurements and metrics in a way that is invisible to the user will help make the product requirements gathering for upgrades, updates and new versions, very simple.

Steve Jobs has finally created a closed ecosystem with total control of the user experience and the monetization. With the iPod (save the iTouch), the functions were simple and no reason to open an embedded OS to the world. With the advent of the iTouch and iPhone, the walled-garden is back - and it may be that Steve will be able to protect it for quite some time given the stranglehold he has on content distribution to the device through iTunes.

The brilliance of making the file system opaque was less evident to me on the iPhone or iPod. But making it very hard for users to load new applications directly to the iPad (it’s likely the myriad utilities available to the iPod community for accessing the iPod file system directly, such as Senuti, or iPodAccess will work, but are a bit kludgy) means that ISVs have to pay the Apple tax for distribution - much like Nintendo or Sony charge for their game consoles. But will it last?

The operative question is whether we should be considering investing in iPad software vendors, content creators or other members of the ecosystem. With the iPhone, we struggled as many of the apps seemed like distractions or infrequently used - which made me worry about the staying power of an ISV or content player. And a lot of my worries were driven by form factor. But with a larger form factor and most likely dual-platform for most new apps (iPhone/iTouch + iPad), we need to revisit our biases. Quickly.

Will the iPad make it? Is it an iPod or AppleTV? 300k units sold the first day means it exceeded the iPhone 1.0 first day sales. We’re only on day 3 ....

Final Version of State of VC Slides

Sat, 27 Mar 2010 12:58:05 -0400

Snow stayed away yesterday and I was able to present to the Free Lunch Friday crowd at the Rosetech Incubator. Some great questions were asked and hopefully my answers were reasonably coherent.

The full slide deck, minus some licensed content that I don’t have either the permission or the stones to post!

Please let me know what you think ... (click below to download)

Free Lunch Friday March 26th

Sun, 7 Mar 2010 08:54:29 -0500

WIth thanks to David Rose and Bo Bell, we have rescheduled my pitch to the FLF for noon on March 26th and the RTV incubator.

I’ll be talking about the state of VC, not so much in a rebuttal to Ryan Janssen’s economics lesson but an extension to my business. Excerpts from my deck are here, but I’ll plan on showing more data about the VC business and look forward to sharing some thoughts about the future.

I’ll be very candid about my concerns - and have no doubt the entrepreneurs attending will reciprocate. Please let me know if you have any questions or topics in particular you would like to cover.