Checking the technology VC pulse

Following on from The Chilli’s editorials on the VC overhang and decline in technology investments, we took the current investment temperature at a recent panel discussion that took place at the FSA/IEE (Fabless Semiconductor Association/Institute Electrical Engineers) conference last month. The panel was chaired by Charles Cotton, formerly of Globespan Virata and now with Library House.

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Sector preferences: differentiated vs undifferentiated
There were contrasting views on investing in IP (intellectual property licensing) companies, as some members of the panel thought that there were too many “me too” or undifferentiated IP companies out there that will struggle to get traction. Laurence Garret of 3i said that the demand for IP of all sorts is growing, especially when large companies like Philips and Ericsson are shedding design staff, and relying more and more on bought-in IP to accelerate design cycles.

Stuart Paterson of SEP was of the opinion that the UK is an ideal place for fabless chip companies, with more than 10% of the world’s chips designed in the UK and 60% of the European semiconductor design skills based in the UK. SEP’s current investment preference is in new materials and fabless chip models, as opposed to pure IP companies.

Alta Berkeley’s Pete Magowan’s preference was for early standards-based companies as well as digital consumer and storage companies with global perspectives. He disliked ‘me too’ or limited market IP companies, standalone EDA companies that work in a vacuum, and companies that are pure- technology plays.

Guiseppe Zocco of Index Ventures preferred to look at multi-core designs and tools, DSP (digital signal processor) versus just general purpose CPUs (central processing units), ultra low power designs, and designs that make use of increasing software content and/or on-board memory. He sees opportunities and needs for new solutions in RF designs, due to the scarcity of good experienced RF engineers, as well as in new innovative EDA tools and solutions for new 90nm designs. He likes companies that have good core management teams with large market opportunities, and companies that have managed to attract strategic partners.

Most surprising of all were the comments by 3i’s Laurence Garrett, newly re-invigorated by recent successful exits, who not only sees more opportunities for IP companies but also new technologies with disruptive ideas not yet proven in the field. Garrett commented that while other VCs were retrenching during the last few years, they were taking higher risks, in terms of investing in some unproven technologies. For example, 3i invested in mixed RF/CMOS via Cambridge Silicon Radio when other VCs weren’t too sure about mixing RF with digital. 3i will invest in a core technical team and help bring in new management if required to do so; the company prefers to align the interests of founders, managers and shareholders as far as possible. Some now believe that 3i is re-inventing itself and will leverage more from its vast international presence, especially in newly emerging markets.

Someone from the audience pointed out that it is all very well to seek out differentiated product, but that would be difficult in standards-based products – citing that VCs backed more than 30 wi-fi start-ups at the beginning and are likely to do so again when new interface standards are reached.

Some VCs do back seat driving
Should or do VCs have influence in the type of EDA design tools a portfolio company chooses? This was the question posed from the floor by Paul Double of EDA Solution, citing one of his customers who was recommended to switch to a different EDA supplier, even when they were more expensive.

The answers from the panel were mixed. Some felt that VCs see their task as minimising overall business risks in their portfolio companies; some felt that most VCs wouldn’t get involved in operational issues, which are left to the management, except when things go wrong. Others felt that if there was a strategic advantage in choosing a larger supplier, then they would point this out, but leave it to the management to make final decision. What the panel didn’t say was that all large ticket items require a go-ahead from the board on which the VC is represented. It is of course their duty to question the merits and needs of all such big-ticket items.

Although The Chilli would always point out the need for more industry experienced VCs with business-building skills, there is always the temptation (and danger) of passing on some of this experience to the investee companies in the form of making the decision for them and running the shop, rather than just advising. This may create further difficulties down the line if a wrong decision was taken that resulted in massive losses or even a fatality for the whole investee company. Many a time it has been pointed out to The Chilli that industry-experienced VCs get too emotionally attached to their portfolio companies – sometimes to the detriment of the investee companies, especially when some tough decisions are required.

What is an early stage company? The Chilli posed the following question to the panel: what did they understand as early stage companies? As expected, the panel couldn’t reach a consensus as to what defines an early stage company. The answers varied widely, with some defining early stage as companies having more than $6 million in revenue to just a little bit of revenue, whilst others defined them as companies that have already built a prototype; others would consider companies that have a model and some IP.

The Chilli perspective on early stage: given that VCs compete for the best value deals, it is understandable that they don’t want to be cornered into a narrow range. While this may be OK for the modus operandi of a VC firm who would like to get a peek at most available opportunities, it creates havoc for founders and entrepreneurs who can go through quite a lot of false hopes and not forgetting the amount of shoe leather, that is worn out before narrowing down the target choices. This can cause not just loss of energy, enthusiasm and motivation, but can also lead to frustration and sometimes downright anger when one is told after several meetings that they don’t invest in ‘early stage companies’. In order to alleviate some of these problems, The Chilli published its own definitions four years ago (click here to see these definitions).

While we have received a lot of feedback on this subject since publishing them, our definitions may not be perfect but in this uncharted territory they have so far enabled many to lay down some tracks on which everyone can run on. They do at least allow all to see clearly which track the entrepreneur, investor and professional advisors are running on, and how the people involved can avoid the ones that don’t match their own pace.

Comments on this story? Send an email to the editor at Editor@TheChilli.com