Startups, Technology, Web 360

US lagging behind India, China in semiconductor industry

Investor bemoans lack of startups in US.

Bureau Report

WASHINGTON, DC: The governments of China and India will each announce plans to pump billions of dollars into their semiconductor industries this year, said Lip-Bu Tan, the chief executive of Cadence Design Systems Inc. and a veteran investor, bemoaning the decline of U.S. venture capital funding for chips.

In a roundtable with tech journalists before his keynote at the annual CDN Live event in Santa Clara, California, Tan shared his opinions on the lack of startups, the rising cost of chip design and the need to reposition the EDA industry for growth, reported Design & Reuse.

“China and India are pouring money” into semiconductors and “the U.S. government should do the same,” said Tan. If it doesn’t, some day U.S. engineers “will have to go to China to work, and its painful to see your kids go to the other side of the world,” he said.

Tan said the U.S. was once home to as many as 30 VCs active in semiconductors, but now has five or fewer, including Walden International, Tan’s own company that has many investments in the U.S. and China. “It’s very alarming for me personally to see, so I am trying to reverse the trend,” he said.

“If the VC trend is not reversed, innovation will be threatened, so it’s important to see more startups funded,” said Tan. “The China and India governments are making semiconductors a strategy industry, but I would hate to see those countries have the most semiconductor companies.”

Cadence’s board of directors has discussed starting its own internal VC fund, following in the footsteps of larger companies such as Intel and Qualcomm. So far it has resisted what it sees as a risky business outside its core, but it may opt to loan startups design tools they can pay for once revenues come in, he said, said Reuse.

For the past decade, VCs have turned to Internet software and services companies such as Google and Facebook that have lower startup costs and higher return potential than most chip startups. Even Tan has participated in the trend as a member of the board at Weibo, a China social networking site that gained 500 million registered users in two years, the report said.

Tan points to Walden startups such as Ambarella as examples of viable chip ventures. With investments of less than $25 million, such companies grow to profitable firms that could be acquired for upwards of $100 million, he said. “If you can demonstrate that, the VC money will come back,” he said.

Tech companies including Cadence have done their share of acquiring startups to access new technologies and products. Most recently Cadence bid to buy Tensilica in Silicon Valley and Cosmic Circuits in Bangalore to expand its portfolio of intellectual property cores, said Reuse.

Cadence has plenty in the bank for any other acquisition candidates it finds. The company has $827 million in cash, generates more cash each quarter and has a $250 million line of credit at a relatively low interest rate. “We generate a lot of cash, so liquidity is not our barrier,” said Tan.

The chip designers the EDA sector serves, however, face a tougher financial outlook. Market watcher Semico Research predicts the $108 million required to design a 28-nm chip could balloon to $210 million at the 14-nm node.

The costs will drive more consolidation in big mobile and server platforms, Tan said. Meanwhile, analog, automotive and industrial parts will avoid the bleeding edge processes, he said.

Those dynamics could dampen growth for the EDA sector. That’s one reason why Cadence is joining Synopsys in expanding its offerings of IP cores, a business Semico says is growing about 19 percent a year, said the report.

“When you show double-digit growth, people start to invest in you and when you are not growing they ask for a dividend,” said Tan, complaining the EDA sector is severely undervalued today at its current 2.4-2.5 multiples. By contrast, service companies such as Salesforce.com trade at eight times their earnings, he added.

A full service of integrated cores and tools can also help systems companies innovate faster, expanding the entire electronics pie for everyone, he believes. “If the electronics industry grows from $300 billion to $500 billion, we are all better off–otherwise we eat each other’s lunch,” he said.

EDA companies are all in the same boat. “If one stock goes down, we all go down,” he said. “We should not let people think EDA is only a $5 to $6 billion industry,” Tan said. “We need discipline about articulating our value proposition…growing from EDA to IP to [platform] software and services,” he said.

Tan added one more item to the EDA to-do list—be more fun. “We need more excitement so that rather than join Facebook or Google we can get college kids to join EDA companies,” he said.

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