Building a chip startup is such an expensive proposition that few investors are taking it on anymore. So IBM’s (s IBM) venture capital group is developing a partnership program with several VCs active in the semiconductor space aimed at reducing the costs associated with chip manufacturing — and subsequently changing the financial risk associated with backing such deals.
“Because we think new semiconductor investment will have extreme importance for our industry, we need collaboration between the small guys and the large guys to find ways to combine our assets and technology with their nimbleness and innovation,” said Juan-Antonio Carballo, a partner with IBM’s venture capital group. “We hope these new startups will become some of the new market players — the new Broadcoms and Marvells.”
Carballo suggested that the partnership will involve access to IBM’s intellectual property, manufacturing and design knowledge — and perhaps even its fabs. By providing access to expensive manufacturing R&D and thus lowering the cost of producing the chips, such a program might help chip investors lose less money if the chip technology fails or the market just isn’t there. Just last week, NetEffect, a 10-Gigabit Ethernet chipmaker in Austin that had raised $44 million before a recapitalization in 2004 and $55 million after that recap, was acquired out of bakruptcy by Intel for just $8 million. Those kinds of losses aren’t uncommon, and can deter investors.
However, there are investors who still see the sector as worthwhile if startups can use capital efficiently — witness Samplify Systems, which said this week that it raised $11 million and then managed to build its first chip for only $5.6 million. Perhaps IBM’s program could help others reproduce that kind of fiscal discipline. Carballo declined to name the VCs IBM is working with, but he did say they come from three of the top firms currently investing in chips. Firms that fall under that category include Mayfield, Charles River Ventures, New Enterprise Associates and U.S. Venture Partners.
Carballo said the effort was part of a long-running trend toward chip industry partnerships aimed at reducing the escalating cost of producing chips. He offered the example of the fabless model that gained prominence in the ’90s, where chip startups and eventually large manufacturers began outsourcing the building of chips to foundries. Within the last few years, as designers have crammed more transistors onto smaller chips, R&D partnerships designed to share manufacturing and R&D costs among large players are becoming the norm. Now IBM wants to involve smaller players, too.
IBM won’t announce the specifics of the program for a few more weeks, but chip startups and investors should keep their ears to the ground. Times may be tough, but in our digital world, semiconductors can offer us new ways to play and even new ways to conserve energy. Finding those markets can make the investment worth the risk.