Semiconductor IP industry - ready for restructuring?

Part three: mid-life crisis

By Bipin Parmar

In part two, we examined how a few friends (Michael, Terry, Dave - MTD) started off as a body shop and ended up as a semiconductor intellectual property (SIP) vendor. But instead of generating revenues of $100K to $150K a head, their revenue has dropped to less than $50K a head. Their customers have become more demanding and the executive team is faced with another set of challenges, this time coming from the first round VC investors. They are not happy with progress and threaten to bring in a new CEO, who will bring his own team with him. So what's the score? Let's pick up the story from part two.

14. During the boom times, VCs were knocking on your door, hoping that new capital injection will allow you to clean up any shortcomings and expand the business rapidly. The VCs expected you to be capable of building a steady, strong, continuous revenue stream and within a reasonable time - say a couple of years - even hoped to start generating positive cash flow and some nominal profit.

15. With the VC funding, you had expanded your infrastructure, to repeat your success model in the home market. Of course you are going to need a top-notch salesman with the knowledge of the local market, so you hire a couple of those. They need technical back up, so you hire application engineers. They need more marketing support, so you expand the marketing team as well.

16. They are all going to need PCs, phones, desks, so you might as well open a small local office.

17. Instead of relying on external lawyers, who don't understand your business and charge a fortune, you decide to bring the legal function in-house and hire a lawyer. You will also need to take care of the expanding team, so you bring in accountants, human resources and administrative staff.

18. Your new sales people have found that the local market needs a slightly different flavour of your existing SIP, and have therefore convinced you to pay a local body-shop to carry out the modification, but then you are going to need a new project manager to manage the new project, as you want your sales staff to concentrate on sales.

19. The new project manager decides to have a new company logo, to provide a better image and bring more customers. However, this creates internal turf wars with the marketing folk and then you find you are spending more time on 'UN peace-keeping' than with prospects and partners.

20. Your sub-contractor does such a good job that you think they do a better job than your in-house team, at a fraction of the cost, so you decide to acquire them, which gives you an additional revenue stream, as well as providing a local market presence.

21. Now you find that your costs are going out of control, especially at the new offices that were opened recently to service your offshore customers. You find that sales are only good at selling that which you don't yet have, and they cannot sell what you already have. The newly acquired companies need twice the number of staff that they previously had (they used to work weekends and nights before, but you only discovered that after the acquisition, as your due diligence was not thorough).

22. Meanwhile, the apparent success of your business (read: extra staff, sales offices, new customers, but no positive cash-flow yet) has attracted a whole host of newly formed start-up companies, who want to emulate your so-called success. Customers now have more to choose from and are demanding a higher level of service and support.

23. Money is being consumed at a far greater rate than you had planned, and you will soon need to get another round of VC money to stay afloat. You need to show much more progress since your last VC round. So you decide to invent a whole new class of customers called evaluation customers (these customers play with your product and never pay or have no intention to pay, but they want their engineers to see and feel the latest in the market, and if they don't have to pay, what is the harm?). Now you can present a list of blue chip names that are "evaluating" your product, and the VCs will be very impressed. You also get your lawyers to file a couple of key patents that please the VC even more. You put your world domination plans on hold until more funding is brought in.

24. With the new VC round, you can go on an acquisition spree, so you can buy a couple of start-ups that complement your product line. They also have some top line revenue which when added to your top line creates an illusion of high growth (people forgot what you acquired a 18 months ago). Your addiction to top line growth makes it likely that you may even acquire the wrong company, in the wrong country, but the VCs are impressed, so you continue.

25. Suddenly, the house of cards that was built with the last VC round comes un-hinged. With the stock market meltdown, your whole company is valued far below the last funding round. You start dreaming of the Titanic's maiden voyage and see icebergs whenever you drive your car.

26. Welcome to the real world. Now you, your founders and the early team, that have worked so hard to build the business, have a whole new set of challenges. Your VCs are getting downright nasty, as they are about to lose their own jobs, unless you perform as planned, regardless of market conditions. You suddenly find that after all the effort, you and your team own less than 10% of the whole company and to add insult to injury, the value is less than your old car.

27. You contemplate quitting. The pressure is on to replace you and your team, with a new management team, who will toe the VC line. You blame your lawyers for not explaining or agreeing with a clause that allows them to veto your decisions, replace you and take over the whole place.

28. For the sake of your health and on the advice of your friends, you decide to take a long break.

This is a typical, real example of life today in a British high-tech start-up, but things don't have to be this way. Many lessons can be learnt from this and things can be planned for a positive outcome, which takes us to part four.

In future issues of The Chilli, there will be special reports on the fabless semiconductor industry, systems houses and more. If you have not already registered to receive regular alerts, please take a moment to fill in your registration details - it will take less than two minutes.

Comments on this story? Send an email to Bipin@theChilli.com

© Chilli Publishing Ltd 2003

28FEB2003