Early stage semiconductor investment—once a mainstay of U.S. venture industry—is hitting the skids.
After a marked slowdown in 2007, Series A semiconductor investments slowed to a virtual halt in the first half of this year. And venture capitalists previously active in the sector say that they don’t expect a dramatic turnaround soon.
“I think it’s going to get worse before it gets better,” says Andy Rappaport, general partner at
Considering that few semiconductor startups go on to become hugely valuable businesses, he adds, it’s sensible for VCs to back only a handful each year.
Rappaport was one of four venture investors who participated in a panel discussion in Palo Alto, Calif., last week, sponsored by the law firm Pillsbury Winthrop Shaw Pittman, that discussed the faltering semiconductor investment levels in the United States. Panelists pondered what kind of future there is in early stage U.S.-based companies in the sector.
Ron Yara, general partner at
Tallwood, which exclusively backs semiconductor-related businesses, has invested in seven companies so far this year. But none were new early stage additions to its portfolio.
Even so, Yara says that he remains optimistic about U.S. investment prospects, particularly on the design side.
One benefit of the low-level investment, VCs noted, is that there’s less competition for companies that do get funded.
“Some of the pullback we’re seeing is, frankly, healthy, because we were way over-funding stuff,” says Rich Redelfs, general partner at
Redelfs says overfunding was particularly rampant early in the decade when he served as CEO of WiFi semiconductor provider Atheros Communications. In 2001 and 2002, he recalls counting 23 venture-backed WiFi semiconductor companies, which he says was far more than the market could bear at the time.
Still, while U.S. investments levels are down, startups must contend with competition from overseas, where funding looks stronger.
“For a company headquartered in the U.S., it’s really hard,” says Lip-Bu Tan, chairman of
While the firm has invested in several U.S.-based semiconductor companies in the last few years, it’s been especially active in Asia, and China in particular. Lip-Bu says the firm now has nearly a dozen portfolio companies in the sector based in Asia.
For those startups that do stay within U.S. borders, fabless business models are key, says Tim Monahan, CFO at LV Sensors, an Emeryville, Calif.-based developer of tire pressure sensors. The company raised $34 million in funding in 2005 and 2007 from Mayfield Fund, Panorama Capital, U.S. Venture Partners and other investors, according to Thomson Reuters (publisher of PE Week).
“The days of making our own product are over,” he says. “Today, startup semiconductor companies focus on designing and selling.”