So why not set up a company, do the development and make some money? After all, hasn’t Intel just paid a rumoured $300 million for Movidius and wouldn’t it be nice to get some of that money? As those at the GSA (Global Semiconductor Alliance) Entrepreneurship Conference 2017 learned it isn’t as simple as that, even for Movidius.
What we are looking at is two groups of people, those with ideas (potential entrepreneurs) and those with money (investors). Those with the money provide it to the idea people in the hope of, at some stage to make a profit on their investment. The idea people are often driven by more complex motives. Making money may be one of them but underlying this is usually the need to “make a difference” by creating a new product or service. Alongside this there is frequently a frustration with the confines of a large company and the desire to show how things can be done better.
The classic model of a funded venture starts with seed funding to provide the money to demonstrate that an idea is feasible. This seed funding may be from an investor – perhaps a business angel. But it may also be from the founder/founders’ own resources, such as savings or family and friends. Once an idea is seen to be feasible, then R&D Capital takes the company forward to creating a product. Another funding round (Go-to-Market Capital) may be needed to get production up and running and after sales begin further Expansion Capital, can help build the company still further. At each funding round the investors will be buying shares, normally at a higher price per share, in the company, so the founders own percentage diminishes but its value may grow. At each stage investors will want re-assurance that the idea is in fact going to be a real product, through evidence such as customer orders, or at least very strong expressions of interest, and market numbers.
At some point the investors will want to see a return. This might be by floating the company on a stock market (an Initial Public Offering or IPO) or, more normally in technology, through acquisition by a large company.
The problem for technology companies, other than pure software companies, is that the amount of capital needed to demonstrate that the idea works is very large, particularly if it involves making a chip at an advanced process node. Investors will not be able to see comparative figures since the markets being addressed may not yet really exist. Customers are not going to express measurable interest until first silicon is available, and, even worse, even when you achieve a design win, the customer is going to have to complete the design and build a market before the win translates into volume shipments. Investors have to combine long term horizons and acceptance of high risk. In return, they will want much higher returns.
Investor categories
There are three major categories of investor. A business angel, is normally a wealthy individual whose role, as well as bringing very early stage money would normally include advice. Venture capital companies (VCs) are specialists in funding entrepreneurs, normally by managing funds provided to them by third parties. Strategic Investors are a relatively new phenomenon, and are funds from large companies used to invest in start-ups that might provide strategic technologies. Three such funds, from Infineon, Nokia and Bosch presented and they have very different objectives and work differently with their investments.
There is still a difference between US and European VCs, both in the way they think and also in the funds they have available. The differences in financial law means that in the US pension funds and university endowment funds are freer to invest in VC activity and are able to look at longer terms, in excess of ten years, for example.
Finally, here is a collection of advice from the speakers at this year’s GSA (Global Semiconductor Alliance) Entrepreneurship Conference, which included start-ups, VCs and strategic investors. While it is aimed at people building large companies, much of it is relevant if you are thinking of staying relatively small.
•Look to build a solid management team as early as possible. Initially it might be better to use external resources than appoint someone who will not be up to the job when the company gets bigger. Consider Personnel Management, Accounting, Marketing/Sales/Customer support, Operations, Technology, and Investor relations.
•The founder may not be the best person to be the CEO.
•Set up a strong board with, as non-executive directors, people who understand your market and technology, and listen to their advice.
•Within the company, keep thinking lean: use one person where an established company may use four people.
•Founders will have to work long hours for far longer and for less money than you might expect.
•External events (such as the 2008 downturn) can have shattering impacts on your plan
•While investor bias against semi-conductors has lessened, it is still present. The word solution is often overused marketing jargon but providing more than just a chip is increasingly vital for market acceptance.
•Look carefully at markets, and focus on some strategic targets. Continue to do this and monitor emerging markets. Movidius was saved by a customer working in a market (small non-military drones) which didn’t really exist when the company was founded.
•Look particularly at markets undergoing disruption which you can leverage to your advantage. Kalray, a French developer of manycore processors (first device with 288 cores) originally saw themselves as serving many markets but currently has focused on data centres where, as solid-state storage is replacing rotating disks, there is a need for very high-performance processing, and autonomous vehicles.
•Try to stay with initial, non-dilutive, funding (i.e. funding that lets founder retain more shares) for as long as possible. Also make sure that other members of the company will share in the success.
•When seeking funding, aim to build a strong syndicate of investors who can carry your company forward.
•The exit horizon of the investors is important – find those who have patience.
•Strategic investors can be a very valuable resource, but you will want to think carefully about those who invest for longer term acquisition. In an ideal world having two or more strategic investors would be optimal.
•Look internationally as early as possible. Silicon Valley has both investors and customers and so does, increasingly, China. You have to be there to get to know them.
•Don’t call yourself an IoT company
The European investment world is changing and there are investors who understand technology. XMOS has had long term support, and there has been significant funding for companies like Graphcore and Ultrahaptics in the UK.
So maybe you should dust off that great idea, prepare for a number of years hard slog, and make a difference.
