<![CDATA[InsideChips - Marketing]]>Fri, 02 May 2025 18:48:08 -0700Weebly<![CDATA[Managing the Startup Marcom Program]]>Wed, 10 Dec 2014 18:50:04 GMThttps://www.insidechips.com/marketing/managing-the-startup-marcom-programPicture
From a management viewpoint, one of the biggest dilemmas of startup technology-based companies, which are relatively small and with limited resources, is how to get their names spread throughout the electronics community. Especially in the case of semiconductor startups with limited budgets, to do so sometimes requires guerrilla tactics. But one of the pitfalls for engineers who start up a company is the notion that if they build a better mousetrap, the world will come and beat down their door to buy their product or service. That may be the case for Internet companies today, but it's not true for most IP and IP-related semiconductor companies.
In today's competitive semiconductor business, marketing is what often differentiates one company from the next. Part of the effort is the key task of developing an integrated marketing communications program. The strategy is different for bigger companies, though, so my words of advice will be focused on the specific situation of smaller companies--those with dozens to a couple hundred employees.

The heart of the integrated marketing communications program flows from a clearly defined "top-down" plan in the form of corporate objectives and strategies to achieve them. The strategies are grouped accordingly: products/cores, prices/licensing/royalties, and promotion. Emphasis is on the integrated plan that ties all external communications together.

How to implement the program is a key issue. In a developing company, the president or the VP of marketing could wear the internal PR hat. Later, a skilled professional can be dedicated to this task. Assuming the company has funding or seed capital, I recommend a high-tech external PR firm that understands the IP scene from an international basis. From my experience, engineering-oriented IP companies need the services of a professional PR firm to help them craft corporate, market, technology, and product messages. They can also be very helpful in setting up the message development and competitive differentiation for product launches. But how do you find the right PR agency? Get recommendations from industry associations (e.g., SIA, FSA, others) and strategic partners, and look at whom the competition is using. Though PR agency budgets vary according to the tasks to be performed, a typical number might be in the $100,000-per-year range.

What's in a Name?
Choosing the company name is one of the most important strategic decisions in the life of a startup. If not done correctly, changing the name later, for whatever reason, will be more costly and time consuming.  Name changes also entail explaining the new image to the market.

In today's Internet age, one of the key constraints should be that the domain name is available or can acquired for a reasonable price.  The Internet now dominates company naming strategies.  Your name must come up in searches related to your products and services.  Naming strategies are beyond the scope of this report but in a nutshell it should include these characteristics:

  1.     Internet domain name or derivative is available
  2.     Memorable, catchy, fun, easy to say, unique selling proposition
  3.     Not too long, confusing, or have unintended meanings
  4.     Use as trademark, does not violate existing trademarks
  5.     Reflective of business now and in future
  6.     Avoid the commonplace and generic, the trendy, the acronym

As a founder, do not come up with a name by yourself -- sometimes done by founders who look at their ventures as their baby.  Do not worry too much about the company logo initially but treat this seemingly easy company naming task as one of the most important decisions to be made.  Brainstorm, work the thesaurus, search the web, do trademark search, consult with PR experts, test it with industry contacts in your field, sleep over it, brainstorm some more.  When it all resonates and passes the tests, you have found a good to great name.

Successful Selling
For semiconductor startups, the basic concept that they're "market-driven," not "marketing-driven," is crucial. If market-driven, the company develops services, IP, and products based on the market's (or the customer's) needs. A marketing-driven company, on the other hand, emphasizes advertising and other techniques in order to create demand. This is an important distinction because chip makers sometimes invent products and services after inadequate or faulty market analysis: These companies have very likely tried to drive demand via massive advertising campaigns--with disastrous results.

An integrated marketing communications program is the proper mix of all communications elements required to execute a company's stated promotion strategy. In the semiconductor industry, these elements are typically collateral materials, sales promotion materials, display advertising, direct marketing, trade shows, seminars and workshops, speaker or authorship opportunities, and press relations. Today, a presence on the Internet has also become very important. A cohesive corporate Web site not only has a growing impact on initial customer perceptions, but it permeates other aspects of external communications with customers.

A company's promotion strategy must be "top down," based on corporate objectives, and driven by accurate analysis of the current and potential markets.

My recommendation, then, is that the first and foremost task should be to take care of the Web. This wasn't my advice five years ago, but today a Web address is paramount: If you don't have one, you're not on the radar screen. Register a good domain name and create the best site you can within budget. The fine points of Web site development are beyond the scope of this discussion, but here are some general tips: In addition to the typical company presentation, make sure the design communicates the image your company wants to project. Post such information as corporate background, biographies of key executives (with pictures), press releases, articles, and some typical successful project engagements. Remember, the Web is a worldwide medium, so speak the language of your audience. If a significant portion of your market is in Japan, for instance, consider a bilingual version of your site down the road.

From the electronic versions, printed versions of the various collateral documents can follow. Develop a company press kit consisting of corporate backgrounder, product information, biographies, case studies, and photos of key executives. Make sure these collateral materials tie in with the company name, logo, and image.

Have PR, Will Market
Next, focus on press relations. This activity entails establishing relationships with key press members and analysts who cover your specific industry. Write up press releases when the company has new developments. Try to figure out what's innovative and unique about your company and tie it in with the write-ups. Then send them by business wire services, by post, and by e-mail. Press releases have two big advantages over advertising: published press releases carry credibility, and they also often constitute a third-party endorsement. For that reason, it's important to form good press relations with key analysts and luminaries in your industry.

I consider writing articles for trade publications a very important part of the press relations program. The company's top management should foster an authorship program among its employees: Draft a plan, tout it, create incentives for writers, and have an annual "silver quill" award day for the best articles. Make such activities a big deal from a management viewpoint. In the meantime, keep an updated index of magazines and their editorial calendars that apply to your specific products and services. Contact their editors four to five months in advance to offer article proposals and ideas. Relationship building with editors is a surefire way to establish good PR.

Don't neglect display advertising, for it's an efficient way to reach targeted audiences. One disadvantage of press releases is that coverage isn't assured; when you place a display ad, though, you know the message will be printed when and where you want it. It's more expensive, but its cost effectiveness can be improved by carefully choosing media that reach the target audience. For effective space advertising, consult with an industry professional: I view it as more of an art than a science.

Overall, advertising can accomplish a number of tasks: establish contact with new customers, create awareness, raise interest, build preferences, and keep customers sold. Effective advertising, though, requires a careful balance of various factors: the message, the product and/or service, the current perception of ranking in the market, a creative strategy and execution, concentration and dominance, frequency, reach, repetition, continuity, and media selection.

Icing on the Cake
Direct mail is another promotion venue to consider. Now more commonly called "target marketing," direct mail delivers a more pinpointed message to a specially selected audience. Though each direct mail campaign can cost more than a space advertisement, it's definitely less expensive than sales calls. Direct mail is popular in the U.S., so it can be used effectively for selected promotion objectives. For example, you can advertise your new state-of-the-art Web site with a postcard to current and prospective customers.

Finally, trade shows and conferences are important ingredients in the marketing communications mix. These industry gatherings are good opportunities to meet potential customers and contacts efficiently--as well as check out the competition. For IP companies, some of the more important shows to consider are those industry-specific conferences in the U.S., Europe, and Asia: DAC, DesignCon, and the Embedded Systems Conference, to name a few.

Trade shows and conferences also add ancillary benefits, such as providing speaking opportunities. Treat those opportunities the same as you would the placement of articles in publications--they're excellent PR vehicles for the company. The CEO and top marketing executive should actively participate in the presentations.

Whatever the specifics of your marketing communications campaign, plan it a year in advance. Monitor, adjust, and stick with the program. Your small company won't be able to visit every potential engineer who may need your chip or IP; yet you need them to think of you when a project comes up that may utilize the kind of technology your company offers. Work smart by having a sustained, long-term push to approach your engineering audience in a variety of ways.
]]><![CDATA[The All Important CEO]]>Fri, 21 Nov 2014 22:50:22 GMThttps://www.insidechips.com/marketing/the-all-important-ceoPicture
Every design house can buy the EDA tools, hardware, and software it needs to operate, but its success depends on its engineers' brainpower, company process and culture, and the CEO's abilities. In small IP and design service companies in particular, the CEO takes center stage.  

The classic design house CEO is an engineer who either has a vision or just wants to run his own show. His leadership expertise probably includes strong engineering project management, but not likely skills in business-related tasks. He works in a regional or a national environment in which proximity to the customer offers inherent benefits. The CEO of a classic third-party IP provider, on the other hand, may also be an engineer, but most likely exhibits a much better mix of business and engineering skills. He must oversee a product that the company will resell to many customers from all over the world.
In the small IP and design service companies, the CEO determines the company's success and extends his influence throughout the enterprise. He directs operations, marketing, and finance; provides the background necessary for fast growth in a resource-constrained environment; and deploys a management team. Equally necessary are his personal attributes and "people skills": He must exhibit intelligence and high energy, a strong work ethic, openness, and even a bit of humility. He's both coach and head cheerleader.

Perhaps the most important skill a small-company CEO can demonstrate is the ability to acquire--and keep--the engineering talent the company needs to succeed. In today's Silicon Valley, engineers are usually more loyal to their industry than to their individual employers--an attitude produced in part by the view taken by electronics companies that layoffs should be dictated by quarter-to-quarter financials.

Clearly, the CEO must answer some very fundamental questions regarding the motivations of his most important asset, the engineering team: Why would engineers want to work at the company? Why would the engineers want to jump through hoops to deliver the product correctly and on time, even in a system with an imperfect process?

A set of broad guidelines can help to improve the process at IP and design houses. Begin by recruiting several superstars and implementing a cycle of progressive training for junior engineers. Create a strong culture and foster teamwork. Harness the veterans' experience by letting them conceptualize new products and improvements. Keep designers well stocked with the latest tools. Require engineers to adhere to highly professional standards--graduate degrees, ongoing training, and specialization--but pay appropriately.
Key characteristics that CEOs should posses:

  • Experience in development, operations, marketing, and finance, such as business unit director of mid-large chip maker
  • Background in fast growth in resource constrained environment
  • Managerial team building skills and ability to delegate
  • Intelligence and high energy
  • High integrity, quality, strong work ethic, environment
  • Openness in internal and external matters
  • Moderate ego and humility
  • Coach and head cheerleader

As the IC industry's enabling technologies--such as fabrication processes and EDA tools--become more and more commoditized, small IP and design houses can thrive. Those companies will reflect the value-added concept, becoming spheres of excellence in various niches. Efficient processes, knowledge of markets and customers, and skills in managing employees will determine a company's success.

]]><![CDATA[Building a Sales Presence in a Foreign Market]]>Wed, 01 Oct 2014 18:30:05 GMThttps://www.insidechips.com/marketing/building-a-sales-presence-in-a-foreign-marketPicture
Companies operating only in the American market or in a limited number of global markets understandably worry about entering a new foreign market. Risks are many. Opportunities for problems are enormous. There is also the additional risk of taking your eye off your core business and revenue stream. What should a company planning to enter a foreign market do in order to protect itself from failure and improve its chances for success? It can create an eight-step plan that includes:

  1. Properly setting expectations
  2. Developing a bank of resources
  3. Studying local market norms
  4. Deciding upon a foreign national or expatriate as country manager
  5. Developing a champion customer
  6. Wisely selecting sales channel partners
  7. Preparing itself for fraud and scandal
  8. Incorporating lessons from competitors into its expansion plan
Expectations
When a company begins discussion about creating a sales presence in a foreign market, each member of the executive team probably has a different view of the reason for expanding internationally. Growth may be the purpose for sales. Manufacturing may prize greater capacity utilization of existing plant. Finance welcomes the opportunity to reduce financial risk from a broader array of revenue sources. Engineering may seek the opportunity to create an alliance with a foreign customer or competitor. If the expansion project is to succeed, the executive team must develop and agree to a shared purpose.

Various groups must buy into the foreign market expansion, since those groups will be required to provide resources for the project. Ensure that all groups are prepared to offer resources. More important, confirm that all groups actually buy into the project. For best results, ensure that each group responsible for applying resources in the foreign market actually feels as though it owns its respective piece of the project.

Lessons about the foreign market come from many sources. If the executive team gathers lessons of competitors, the expansion plan that it prepares can avoid many of the most common and frequently repeated mistakes made by American companies. Suppliers already operating in the market have a number of errors made and solutions taken. Gather as many of those stories as possible. Compile those tales before marching into the new market in order to avoid many of the simplest errors. Not making blunders can save precious management time and scarce corporate resources.

Many groups at headquarters must provide resources when creating a sales presence in a foreign market. Identify the resources each group will provide to the foreign market effort. Ensure that all groups providing resources include costs associated with the resources in the budget. Top management must not only proclaim support for foreign expansion, but it must demonstrate that support frequently. One method of demonstrating top management support for the new foreign sales subsidiary is to have the head of the foreign team present to various forums when he or she comes to headquarters for periodic visits. Another is to ensure that members of the executive team visit the subsidiary when traveling abroad.

Resources
When a company begins to plan its move into a foreign market, it can draw resources from several quarters. Divide resources into two broad groups: data and network. First, use data to build the expansion plan. How large is the market and how fast is it growing? Does the marketplace use distributors, reps, or dealers? How eagerly do customers accept new entrants? How do we contact and interview potential channel partners?

Second, develop a network. When an American firm enters a new market, it begins with no established network. Develop and constantly nurture the network. The objective of the network is to have someone to call when faced with a dilemma, unforeseen challenge, or scandal. Industry trade associations are a good source of resources. Association staff and member companies both domestically and in the foreign market can provide insight to the foreign sales operation in its start-up phase.

The U.S. Department of Commerce has a presence in every American embassy around the world. One major purpose of the DOC abroad is to help American companies sell into foreign markets. DOC can provide data on the size and composition of the foreign market. It gathers data on the manufacturing capabilities of indigenous competitors, and the presence and plans of fellow American companies. It organizes trade missions and trade fairs. The DOC staff can help arrange introductions to customers, potential sales partners, and staff of other American companies in the market.

Early steps when establishing a presence abroad include initiating relationships with a bank, accountant, and attorney. While creating these relationships, be sure to develop the human side as well as the functional side of those relationships. Meet the executives of the bank. Include them in your network. In some markets, bankers can arrange introductions to customers that otherwise would be difficult or take an unbearably long time to set up. Attorneys will certainly assist your company by filing all the necessary documents with which your company can legally operate in the foreign market. However, they can also answer a myriad of questions you may have during the start-up phase. Those answers and guidance can only come about if you take the time to develop a personal relationship.

As you go about interviewing various manufacturers' representatives, distributors, or dealers, consider including both the partners you select and those you reject in your long-term network. If you interview ten distributors and select two, your network will be more valuable in the future, if you solicit advice from all ten, as opposed to only the two with which you establish a formal relationship. A distributor with which you have no formal partnership is likely to provide you with more and different information about your company, channel partners, and new market than a distributor that is obligated to protect its franchise.

Reps, distributors and dealers in foreign markets often form associations. Developing and nurturing relationships here can afford your company access to information unavailable elsewhere. Through such an association, you will have easy access to most other reps, distributors and dealers. That access becomes very important when you must make a change among your channel partners.

An American Chamber of Commerce operates in most foreign markets. Two examples are the American Chamber of Commerce in Argentina and the American Chamber of Commerce in Bulgaria. In smaller markets, the chamber may operate primarily as a social organization. In larger markets, you will discover a sophisticated network of committees that address many industry sectors. Since the chamber is composed of all industries in which American companies operate, it represents a particularly good radar system with which to spot changes occurring in the market.

Irrespective of whether your company plans to relocate a manager from headquarters or hire a local country manager, establishing a relationship with one or two executive recruiters is very wise. A recruiter, particularly one of international scope, is very familiar with problems that arise in American companies. Such a resource can help should you choose to recruit a foreign national as country manager. That resource can also provide counsel regarding dozens of issues as they arise.

Market Norms

All markets have unique characteristics and few are identical to the American market. Prior to entering a foreign market, a supplier must study and develop an understanding of the norms in the market. Understand how the new foreign market differs from the American market. Do direct sales teams sell goods or services? Do sales flow through distributors or manufacturers' representatives? If reps or distributors are used, is it customary to use a sole distributor, or multiple distributors? Do most competitors use a sole rep or multiple reps?

The majority of companies enjoy payment on invoices within 30-to-45 days of shipment of goods in the USA. Achieving 45 days sales outstanding (DSO) may be a manageable objective in the American market, but probably not in many foreign markets. It is important to understand the DSO standard in the foreign market, and to measure the sales subsidiary against local norms.

Management in the Foreign Market

An early decision in the foreign subsidiary is selection of the country or office manager. Does the industry usually staff the top post with an expatriate from headquarters, or hire a foreign national in the local market? Both solutions work and both have problems. An expatriate from headquarters can quickly instill confidence in the subsidiary among staff at headquarters. However, an expatriate will need time to learn customs unique to the local market. During the learning curve, an expatriate will make errors. Some may be costly. An expatriate experienced with the company culture can train foreign staff about how the company operates.

Hiring a foreign national for the top job is the alternative to an expatriate. A well-qualified local manager brings knowledge of customers and market customs to the subsidiary. Since a local GM has neither relationships with the company's executive team nor knowledge of the product line, it is important to have a newly hired manager spend time at headquarters soon after joining the company.

Champion Customer
A great asset in any market, foreign or domestic, is a champion customer. By establishing a special relationship with a specially selected customer, the champion customer becomes more important than just a buyer of goods or services. Select a customer for its strategic value. Establish a special relationship through a number of methods. A supplier can agree to manufacture semi-custom or full-custom product for the champion customer.
One technique is to form a joint team to develop a particular product available only to the champion customer. The exclusivity could apply to a finite period before offering the product to the general market. If supply of product may be tight in the future, a supplier can offer a champion customer preferred lead times.

When establishing a relationship with a champion customer, it is important to ensure that the customer fully understand the comprehensive intent of the supplier. Since a supplier cannot offer a special relationship to several customers, it's important that the customer understand the special features offered by the supplier and what the supplier seeks in exchange from the customer in the short and long term. A management matrix must be mapped out, whereby during a one-year period, engineers of the supplier meet with engineers of the customer; directors meet with directors; president and executive staff meet with president and executive staff. When a supplier develops a champion customer in a foreign market, that customer becomes part of the supplier's foreign network. Once a relationship is established, a supplier can feel comfortable going to that customer for help and advice when problems arise. Advice from a champion customer is reliable because the customer understands that it is receiving greater service than that provided by most other suppliers.

Once a supplier creates and constantly nurtures a champion customer, do not forget to identify an executive contact at both the supplier and customer. This pair becomes the supplier and customer team captains. Problems sometimes take too long to solve. When this happens, involvement of the team captains can elicit a more timely response.

Channel Partners
After deciding to enter a foreign market, determine the shape of the sales organization. Opening with a direct sales organization is probably the most difficult, expensive and risky alternative. Opening with sales channel partners is generally less difficult, less costly, and poses less risk. Sales channel partners include manufacturers' representatives, distributors, and dealers. Prior to interviewing sales channel partners, develop criteria for selection. The most frequent cause for changing representatives or distributors is inadequate due diligence when evaluating alternative candidates. Since the company entering a foreign market is only beginning to learn about that market, it is important to keep options open. Avoid exclusive arrangements. Ensure that you have the opportunity to modify the geography, customer list, and terms of the distributor or representative agreements in which you engage. Always be sure that you have the opportunity to terminate those agreements for cause and for convenience. Sales channel contracts should be reviewed by someone with commercial experience in the new market as well as by a local attorney.

The first year in any new market is a huge learning experience. At the end of the first year, the executive team and the local GM are likely to look back and determine that they could have made some better decisions. If, during an introspective moment at the end of the first year, it is determined that one or more sales channel partners was a poor decision, you will need the flexibility to make adjustments in the sales channel. By demanding flexibility in sales channel contracts, and avoiding exclusivity with a particular partner, you will have the opportunity to adjust your sales channel.

Fraud and Scandal
Fraud and scandal are real possibilities in foreign markets. It is important to develop a perspective about fraud and scandal before opening the foreign office. It is almost impossible to prevent something going wrong in a foreign subsidiary. Although discovery of fraud or scandal does not permanently destroy a supplier's reputation, a slow or poor response to a problem once discovered is unforgivable and unnecessary. A company must have the outline of a procedure to follow once a problem surfaces. When a supplier uncovers a problem, customers and competitors pay attention to how the supplier handles the problem. The marketplace admires and respects speedy and professional handling of a problem. A slow or slovenly approach to fixing the problem becomes part of the subsidiary's legacy, can dampen the company's reputation, and can impede the company's ability to grow.

Less seasoned management sometimes take too long to prepare a solution when fraud or scandal surfaces. There may be an attempt to hide the problem from the outside world. Such an exercise is foolish. It is almost impossible to keep the news of the problem from leaking into the market once discovered. Experience mandates that the best action is to implement corrective action as quickly as possible. The speed of correction becomes part of the foreign subsidiary's legacy.

Competitors Abroad as Allies
Suppliers rarely offer to help direct competitors in the American market. However, when selling in foreign markets, GMs at subsidiaries of American suppliers often recognize each other more collegially. Although there is little communication between American competitors in the USA, GMs managing foreign sales subsidiaries in Timbuktu likely have a cordial relationship. Those GMs are probably members of the American Club and the American Chamber of Commerce. Both attend monthly meetings of one or more trade associations and are members of the local network. When problems or questions about running the subsidiary arise, there is little stigma attached to asking for help from competitors. Fellow GMs of American subsidiaries can operate as part of a general manager's extended network. However, in order to take advantage of that resource, remember to constantly nurture, develop, and expand the network.

Conclusion
The decision to enter a foreign market is significant for any American company. Entry is expensive and mistakes made during the entry process are even more costly. Ensure that the entire executive team buys into foreign expansion. Continuously build and develop a foreign network. Learn and understand the customs of the foreign market. Correct all problems quickly. Develop a champion customer and take advantage of its wisdom. Create and nurture a corporate memory. The lessons learned during the early years of a foreign presence are extremely valuable and ultimately become part of the legacy and company culture. Retaining those lessons shrinks the opportunity to repeat problems in the future.

Submitted by contributing analyst, Glen Balzer, New Era Consulting.
]]><![CDATA[Innovation in an Investment Constrained Economy]]>Mon, 09 Jun 2014 21:35:39 GMThttps://www.insidechips.com/marketing/-innovation-in-an-investment-constrained-economyThe current innovation climate in the semiconductor industry is alive and well, but entrepreneurs have to adjust to the realities of the current economic situation and investment trends.  The world's governmental economic development agencies have always looked at Silicon Valley with envy and paid big money to try to find the key which would unlock the secrets enabling their countries and regions to replicate the creativity machines which thrive in skill centers dispersed in North America (e.g., San Francisco Bay area, Austin, Boston and Toronto).
PictureSource: InsideChips
These skill centers are an engineer's habitat for innovation and entrepreneurship.  Silicon Valley, seen as the most prolific semiconductor skill center, hosts a gathering place for researchers, hardware and software engineers, entrepreneurs, skilled technicians, venture capitalists (VCs), angel investors, consultants and tech-savvy attorneys and certified public accountants (CPAs), as well as long list of supporting service providers.  The skill center ecosystem is unique and tends to be adaptable to boom/bust cycles and economic shocks.

The lubricant which keeps the machinery of innovation moving smoothly is venture funding, and there is less being doled out to aspiring start-ups today.  In a nutshell, venture funding was so plentiful for entrepreneurs during the years leading up to the dotcom bust in 2001 that many weak business deals were financed and venture capital firms with lean track records were founded.  After the shock of the stock market crash in tech stocks (semiconductor valuations in public equities declined 80 percent), the VC landscape changed drastically.   A good number of the new VC players dissolved their operations or became "zombies" left with lackluster portfolios, unable to raise new funds and not making investments.  VCs which rode out the storm were left in turmoil as a severe liquidity drought set in.  When a start-up is unable to convert its private stock into cash, projected returns on VC investments evaporate.   

Venture investing is a niche, high-risk/high-reward asset class; and if returns fall below what could be garnered in safer investments, such as the S&P 500 stocks, VCs become very concerned -- especially when every sector of their portfolio gets hit with few exits in sight.  Even in better times, Sarbanes-Oxley has made it difficult for small market capitalization firms to do an initial public offering (IPO).  When the second quarter of 2008 concluded without a single venture-backed IPO for the first time in 30 years, the National Venture Capital Association (NVCA) warned of a crisis settling over the VC industry.

VCs also faced issues with their limited partners (LPs) -- their investors.  LPs asked VCs to reduce the number of capital calls since their debt-to-equity ratios were causing concern.  Many VCs honored these requests and reduced their funding plans in start-ups accordingly.  In a drive for more transparency, some LPs asked to have their VC partners comply with a mark-to-market accounting rule, a very time-consuming process.  Thus, VCs were left with less time to review new deals.  Because of these issues, many of the recent investment rounds were "inside rounds" where VCs fund their own portfolio at lower valuations.  Investors were faced with the reality of owning their portfolio ventures longer or exit at reduced values in an acquisition.  A recent Fenwick & West survey concluded that in the second quarter of 2009 down rounds exceeded up rounds 46 percent to 32 percent, with the remainder flat.

The liquidity crunch in the VC world has brought consequences for semiconductor start-ups.  Figure 2 shows total VC investment in the semiconductor industry on a quarterly basis since 1995.  VC investment in the semiconductor industry has shrunk to its lowest level since 2000 when it reached $1 billion.  At $170 million, the amount received by start-ups in Q2 2009 is only about 15 percent of the dollars garnered in Q3 2000.
PictureSource: NVCA, PWC
The number of deals has shrunk from 75 to less than 20.  The financings which do occur are Series B and later stage rounds (predominantly C and later stage).  The average round in recent months has been $7 million.  VC investment began to dry up early last year.

Semiconductor start-ups are being squeezed by sharply higher costs to develop innovative chips and dramatically lowered valuations.  A novel semiconductor technology that would have required two to three years and $10 million to $25 million in start-up funding to get to proof of concept a few years ago, now requires six to seven years and something closer to $70 million. For those investments, VCs want their acquisitions to be valued at about $400 million to make the numbers work.  The median value of semiconductor acquisitions has dropped significantly since 2000.  Today's semiconductor acquisition is typically valued in the $50 to $100 million range.  

Nevertheless, there is a continuing stream of semiconductor start-up formation, even in this difficult economic environment cycle.  Semiconductor start-ups are the creative engines which drive the electronics industry because they develop state-of-the-art ICs for next-generation products and set the pace for semiconductor innovation.  Big chipmakers, such as AMD, Texas Instruments, National Semiconductor, Intel, Qualcomm, Broadcom and others, have traditionally relied on innovative ventures for bridging their in-house technologies or as sources of innovation not developed in-house.

The most successful semiconductor companies which will have the biggest potential impact in the marketplace are those that can conceptualize, design and market systems-on-chip (SOCs) which address high-volume applications and develop those chips with software intelligence on-board.  This may require international development teams in the U.S. and in other high-tech development centers.  For example, software development and even IC design has been migrating to such regions as India, China and Israel.

Time-to-market windows for launching consumer products are short, and original equipment manufacturers (OEMs) are looking for chip companies which can provide an entire ecosystem to the user (i.e., the chip, software, development system and reference designs).  
Apple has been a winning example of owning the ecosystem.  While their traditional strength was mechanical design, software innovation and hardware based on proprietary chips from outside suppliers, the company's recent strategy shifted to designing their own processors with the acquisition of P.A. Semiconductor in 2008.

In other words, companies which only focus on building faster and cheaper netbooks, for example, will not have a sustainable advantage in the marketplace.  The winning companies will build "user-friendly" netbooks which have compelling product features that meet the consumer's lifestyle needs.  That's where software can differentiate the hardware to meet these needs.  As multicore chips and programmable devices become more mainstream in the marketplace, the distinctions between software and hardware will blur.
The VC landscape has changed dramatically from a decade ago, when a cool idea and a few key founders were all that was required for a start-up to receive funding. The current investment climate is difficult, and entrepreneurs must take additional action to ride out the storm. The stark reality that founders are facing is one that requires them to revise their attitudes and mindsets about their operations and the valuations of their companies -- not an easy proposition given that they were witnesses to the "big money" glory days of the boom only nine years ago.  Guerrilla marketing, creative partnering, outside-the-box thinking, bootstrapping, outsourcing and seeking strategic investors should all be part of the mix to survive and prosper.

The bottom line is this -- be ready to accept tougher terms. Liquidation preferences, anti-dilution protection, VCs demanding bigger percentages of companies, bridge discounts/covenants and negative covenants (terms based on performance) are now par for the course. Founders should look for added value from their investors, be visionary rather than arrogant, and be prepared to restructure compensation if it is out of balance.  When thinking of exits in the current environment, entrepreneurs should be prepared for $10 million exits rather than the $50+ million exits seen in earlier times.  

Today's challenges to start-ups and innovation in the semiconductor business are not unique. It has been seen and experienced before.  The semiconductor industry has undergone significant growth, followed by job losses in the 1970s, 1980s and early 1990s.  Each cycle has brought the next phase of innovation for the industry.  The law of unintended consequences prevails in some cases.  For example, without the Cold War and the Defense Advanced Research Projects Agency (DARPA), there may not have been an Internet and the World Wide Web which have changed societies worldwide.  The big trends towards energy efficiency, ubiquitous wireless communications, safety, security, convergence of home entertainment and PC multimedia, portable and online storage networks, embedded electronics, productivity and applications yet to be imagined will continue to drive experienced and motivated technologists to start new ventures and innovate, even in an investment-constrained economy.
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