The Changing Face of Semiconductor Investment

Innovation is alive and well in the semiconductor industry. That was a key takeaway from the strategic investor panel at the second annual Silicon Innovation Forum at SEMICON West, and one I can’t reinforce enough within the venture capital (VC) community.

From Left to Right: Sean Doyle, Intel Capital; Eileen Tanghal, Applied Ventures; Kurt Peterson, Band of Angels. Source: SEMI 2014The panel brought together players from the financial and corporate sectors, including our own Applied Ventures, as well as Dow Ventures, Intel Capital, Samsung Ventures Investment Corporation, Band of Angels, DCM Ventures and Tallwood Ventures. I was pleased to see we all shared the same excitement about the many growth opportunities in the semiconductor industry as it continues to transform and drive emerging technologies in adjacent markets.

 
One point stressed to investors and entrepreneurs is that the semiconductor industry is rapidly evolving to meet challenging manufacturing requirements for tomorrow’s lightning-fast, power-efficient devices. Our industry is experiencing some of the biggest technology inflections in the history of semiconductors. These inflections are growing more complex by the day as devices get smaller, thinner and more powerful, requiring new solutions.
 
 
These technology inflections are being enabled by precision materials engineering and it is more important than ever to fund tomorrow’s innovations to address critical challenges and keep the industry roadmap on course.
 
The huge transitions that are beginning to emerge present a unique opportunity for strategic investors like Applied Ventures to step in and leverage our extensive resources to move technology forward. Other investors are already catching on, as the number of semiconductor deals with one or more corporate VC investors has grown from a 2012 low of 9.4% up to 13% in 2013, per internal research based on data from Thomson ONE, an investment research tool. Applied Ventures has invested in six companies over the past six months, extending our semiconductor capabilities into other areas like bioscience for example.
 
What’s driving this upward trend? Corporate VCs simply see what financial VCs don’t:  semiconductor startups often are a good bet with promising growth opportunities. Corporate VCs know their market best and therefore have a better bargaining position to invest at a set price, help focus the startup on value opportunities and mitigate risk.
 
Corporate VCs are also effective funders, as they can bring more to the table than just financials, such as seasoned industry perspective, global reach and access to broad and deep resources that can help shape the startup’s future and enable them to focus on their cutting-edge inventions. A corporate investor can quickly work with a startup to accelerate development and help manage challenges and address areas where they may be lacking, such as go-to-market strategies, sales and marketing expertise, key partnerships across the supply chain, etc. They also generally have an established reputation, and can help to validate a startup’s credibility with influencers.
 
Success in the semiconductor industry shares many traits with a well-managed financial portfolio (to quote Applied Materials’ CFO Bob Halliday at our recent Analyst Briefing): each requires a mix of product innovation, the foresight to spot and seize market inflections, and the ability to quickly turn opportunity into sustainable, profitable growth.
 
The two questions I’m often asked are “What are the most important attributes you seek when looking to invest?” And “What is the best way to work with a strategic investor?”
 
Here is what Applied Ventures looks for in a startup:
 

1. Understand the ROI for your market and make sure you’re solving the highest-value problems with a defensible solution that is differentiated, valuable and sustainable. A big tide raises a lot of ships, so look for large, high-value markets with unmet needs, versus riding a short-term wave.

2. Know what type of “help” you are looking for from the VC company

3. Assess your startup’s “DNA”:

  • Are you capital efficient?
  • Is your team nimble and able to alter course to align with market needs?
  • Do you have the right mix of the best players?
  • Are your senior executives realistic in understanding their capabilities and where there are gaps?
  • Are those less experienced on the team willing to step back and bring in needed seasoned players?

4. Understand the business culture (particularly when working across borders)

In short, VCs have never been more essential in funding tomorrow’s innovations and enabling the semiconductor industry to reach new heights.

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