VC For Semiconductor: Dead or Alive?

By Charlie Cheng, CEO of Kilopass.

Six years ago, I left my Entrepreneur-In-Residence (EIR) role at a venture capital firm to join Kilopass as an “interim CEO”, thinking the venture world will eventually forget about semiconductor as an industry as it matures. So it’s interesting to me how, six years later, the venture investment in the semiconductor industry has evolved, at least from what Kilopass has been exposed to lately.
By way of background, Kilopass isn’t looking for venture capital. With a strong cash balance, no debt, and high growth, the goal is to strengthen the management team, expand the product line, and win the heart of our customers and partners. As such, we’ve looked at, at least three acquisitions, and contemplated the Chinese capital market, recent volatility notwithstanding. It’s through these encounters that I get to see different visions and operations of VCs all around the world. It’s fascinating.

Let’s start first at North America, Europe, & Israel. Plenty of VCs have shut their doors on semiconductors, and the weak ones are basically just winding down the portfolios. But the surprising thing is the number of deals that are being closed in semiconductor industry. There seems to be a flood of talents coming out of industry consolidation, many with great product ideas, betting the giants will be too busy with operational efficiency and lose sight of roadmap innovation. The VCs, at the same time, are backing off from the frenzy of the mobile chase a bit, and diversifying BACK into the semiconductor industry. Two of these, in fabless model, have become our licensees and we expect to see more start-ups again!

Turning to perhaps the most surprising region, start-ups are being spun out of the carnage of a messy semiconductor consolidation in Japan. INCJ, a VC-PE firm in Japan and main investor of Renesas has spun out Floadia, a non-volatile memory IP company. Fujitsu has also spun the SOC business into Socionext. All of these new companies start with enviable assets not seen in North American start-ups, proven technologies or existing business. Unfortunately, they also start with much of the large company culture and business practice that they were running away from. Nonetheless, it’s refreshing to land in the Haneda Airport again, because the ”Semiconductor Renaissance” is hopefully just around the corner.

Taiwan is a worrying spot from venture investment perspective. Kilopass was approached by a very promising start-up looking to be acquired. The fit isn’t perfect, but I was shocked that it hasn’t been picked up already, either by a VC or a publicly held fabless or foundry. It seems the investors are obsessed with the public market volatility and arbitrage, and not enough time to foster the next generation blockbuster semiconductor giants.

Saving China for last, it is a fascinating nimble country despite its heft. After years of investing mostly in business expansion stages, the semiconductor investment appetite has now expanded to include some seed funding, but more importantly restructuring. The Chinese government is investing to reduce its dependency on semiconductor import, which in 2014 was higher than oil import. This simple but powerful vision is mixed in with government’s strategy of using the equity market to support the economic growth target. The end-result is a flurry of semiconductor companies going from NASDAC to Shanghai, at least until very recently, essentially profiting from the jump in the P/E multiple. I suspect there will also be acquisitions of international semiconductor companies by Chinese private equity firms. Both of these essentially change the domicile of the company because of the China nexus (management team, market, supply chain, etc.), and meet the Chinese aspiration to have domestic supply of semiconductor. The question in my mind is, whether these are enough to fundamentally change the semiconductor ecosystem, and if so, how fast. Nonetheless, the flurry of interest to gain access to the frothy Chinese equity market sure makes semiconductor an attractive business to be in again.

UPDATE: And right on cue, Tsinghua Unigroup (Chinese state-owned-enterprise, also Intel partially owned) made a $23B bid for Micron.