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What kind of collaboration does the semiconductor industry need now? How can we get more venture capital money into semiconductors? Is there a future for EDA in the cloud? These are a few of the questions asked by Simon Segars, executive vice president and general manager of ARM, of Lip-Bu Tan, president and CEO of Cadence, at a "fireside chat" (sans fireplace) at ARM TechCon Oct. 25. Excerpts from that conversation follow.
Segars: The theme of this show [ARM TechCon] is collaboration. What's your view of collaboration and what is it important to focus on?
Tan: There are two forms of collaboration. One is horizontal collaboration. An example is OpenAccess, which we contributed to the industry so we can have more interoperability between tool vendors, and help the customer. But the new area we really like is vertical [collaboration]. In some ways ARM TechCon does that, in some ways our CDN Live! does that, by being more focused on the customer. We are driving multiple collaborations between IP vendors, tool vendors, foundries, embedded software -- sometimes we even share locations together.
Segars: In your spare time you run a VC firm [Walden International]. As a VC investing money in semiconductor companies, you're a rare breed these days. Most of your colleagues seem to have given up on semiconductors. How do we get more money into semiconductor startups?
Tan: In 2001 roughly $2.5 billion was invested in semiconductors, either in the startup or expansion stage. That dropped to $1.2 or $1.3 billion in the past two years. This is almost a 60% drop. The other thing is, when we do a deal, we want co-investors who share the risk. I used to have 30 [co-investor] friends of mine but now it's down to less than 5. When you do the financing there are not many people to call.
Simon Segars (left) and Lip-Bu Tan (right) at ARM TechCon 2011
Meanwhile a lot of innovation comes from startups. It is very important to continue funding for startups. It's good for the industry. I'm on the board of GSA [Global Semiconductor Alliance] and we are looking at how we can help get some momentum going.
Segars: Do you think corporate venture funds can act in the same way that a VC does? VCs are looking for money, but we look at it as something we want to grow in our market. I think the motivation is different.
Tan: A corporation will drive some specified application or platform, so they will limit their focus and use their money for exactly the application they want to drive. It's good to have some balance with pure VCs. They bring some added value in terms of having a network, and they can broaden in terms of the applications or markets they serve. If you just focus on a particular application, then you limit the potential in terms of innovation.
Segars: We could come up with a number of reasons VCs don't find semiconductors interesting these days. It could be that social networking looks easier, and semiconductors are getting really expensive. The length of time to get a return is longer and exit options are fewer. What is the biggest factor and what might we do about it?
Tan: If you have $100 million revenue as a social networking company maybe you are worth $10 billion, and on the other hand if you have $100 million revenue [as a semiconductor company] you would be lucky to get a $500 million valuation. So there's a huge difference. That [social networking] is the easy money to make. We have to do the heavy lifting. We have to worry about the process node, the IP, the customer requirements, the design cycle, and then the tools to optimize the design.
Segars: The biggest products in the consumer market right now are smartphones and tablets. The problem is that people underestimate the technology that goes into building these products. They like using them, but they don't want to build them. Do you think this is an issue for the semiconductor industry? Engineering unfortunately looks hard, so somehow we've got to position hard work as fun at the same time.
Tan: We need to create some excitement and attract some of the engineering colleges. This is something I like to do in my spare time; I'm on the board of Carnegie-Mellon and on the advisory board to the dean at MIT and Berkeley. We're trying to create more excitement for the students.
In China, engineers are proud to be engineers. I go see a [government] minister and sometimes they give me a card that clearly says, engineer, and they are so proud and want to make sure you see that. Comparing that to here, how many in Washington are engineers? In China they really appreciate being engineers. I think we need to have that in this country.
Segars: When you look at companies to invest in, how do you judge the innovation that the team is bringing to you? You don't want something easily copied, and you want it to be defensible.
Tan: In the early days I was looking for proven entrepreneurs. Now I think it's more important to be addressing a big market. So first of all, look at the market potential, is it big enough to build a company? Secondly, you want to have some really good engineers. And most importantly, I ask, is the team really spending enough time with customers? Do they understand the pain points and the solution? 50% or 2X better is not good enough; you need to be at least 5X or 10X better and be sustainable and defensible.
Then you have to make sure it has the right funding. Don't fund too much - fund enough to clearly reach the milestones, so they can move on and progress as a company. With a smaller budget you become very creative and that's where your innovation comes in. If you only have a few million and you worry about next year's payroll, then you become very creative.
If you want to be a good VC, or a good CEO, you've got to see a movie called Moneyball. Watch that movie and even better get the book Moneyball by Michael Lewis. I love that book.
Segars: As a VC you must be looking at the costs of bringing something to market. The cost of building semiconductors is astronomical. Is there anything the industry can do structurally to lower costs?
Tan: For a startup, IP is very important. Secondly, startups need to strategically align with the right partners. They have to work with the foundry and they need to find one or two anchor customers. It is very important to define the product. Plan it wrong and you have no chance if there is only a 50% improvement.
The other part is that it's not just the hardware; the software can be very costly. Last year we launched EDA360. Basically it's about application-driven design, where hardware and software co-development and co-validation become critical. If you wait for the chip to come out to start developing software, the time will be too long.
Segars: For EDA tools specifically, we have our own compute clusters around the world, and it would be great to leverage the cloud and use it as we need it. Is that a way that you see EDA going?
Tan: We have been looking at the cloud and how we can provide service to startup companies that need that, and so we have a program in which we're doing that. But the issue is always security, for the customer and for us. Right now we're taking it one step at a time. We're saying, let's have our own secure, hosted environment, and over time explore what makes sense to big and small customers for using the cloud. Clearly the cloud is the way to go. As an EDA company we have to address that environment.
Audience question: VCs are looking at a 30X return. Why should an entrepreneur go to a VC? It seems like a horrible deal.
Tan: VCs add a lot of value through their networks. They can connect the dots. They have built multiple companies and have a lot of scar tissue, and they can help you so you don't have to walk through the same mistakes the other guys went through. Also, there are some opportunities you need money to do. If you want to build a multi-core processor it can take up to $100 million. Family or relatives may not be able to get you that far.
Audience question: This country has exported a lot of manufacturing, at one time because of the cost of labor. Do you see that coming back to the U.S.?
Tan: The cost difference in labor is narrowing a lot. In India, attrition is almost 25%, and where there used to be a 3X or 4X difference in terms of cost it's down to 2X now. I'm a U.S. citizen. I would love to have [manufacturing] come back. We need to have some manufacturing done here.
Also about ARM TechCon 2011:
ARM TechCon Address: High Stakes at Low Process Nodes
Richard, Urban Airship is a company that I like to present as an example of what we are up against in EDA and semiconductor when seeking investment.
They're in Portland, Oregon and started from scratch the first week of June, 2009. At the end of July, 2010, they raised $5.4 Million in Series A financing. A year ago, they moved into swank new quarters in the Pearl District. Yesterday, they announced what I believe to be their first acquisition ...
And Lip-Bu makes a good point near the very end ... some of us are in 'expensive industries' (a term that I would credit to Helge Seetzen, CEO of TandemLaunch, unless he borrowed it from someone else!) and it's not just electronics, there are other high technology areas like biotech and pharma that are seeing Web 2.0 suck all the oxygen out of the investment room (see tech news sites like TechCrunch or GigaOm).