Semicon Industry – Between a rock and a hard place – The Editor

If one were to meet the ten odd start ups that the Indian Semiconductor Association (ISA) had short listed for their awards recently, it would be naïve not to notice that none of these companies are VC funded. These start ups are providing high end services or making products for exciting high growth sectors such as consumer electronics, the automobile industry, healthcare and the telecommunications industry. Then one would wonder why VCs or PEs are shy of this space?

We at Viedea figure that the problem is neither in the ideas nor is it in the realm of funding. The problem the way we see it is in two areas; firstly semiconductor companies, by nature of their work, will not be able to scale up their revenues in quick time because their work is too focused on a particular industry. The R&D itself takes three years to deliver a quality chip or IP and it becomes difficult to predict success of the product in the market. Secondly there are not many Indian products that sell on a very large scale, currently, to provide a ready market for the semiconductor industry.

The eco-system of semiconductors is filled with chip manufacturers (fabless), Core IP designs on chips, Electronic Design Automation (EDA) tool providers, embedded systems companies, OEM’s and finally product brands like Apple, Samsung and the lot. No one knows the size of the semiconductor industry in India because the word semiconductor encompasses a large space and is evolving. Yes everyone is betting big on solar, but anyone who has seen the fab-city in Hyderabad will see how nothing has come out of it.

Let us come down to an example, six or seven years ago a Bangalore based company called Smart Yantra, which developed software IP in the MPEG space, was bought over by US based Genesis Microship Ltd for US $ 6 million, almost 6 times Smart Yantra’s revenue. While the deal was reasonable for a company whose revenues were of that size, the industry in India will typically see more acquisitions than fund raising for at least the next 5 years. Many of these Indian start ups have been riding on the recession wave that hit USA and Europe. There are a few players that are betting big on making their own chips and are servicing the consumer electronic space in the West. The problem is whether these guys can reach the critical mass in production and revenues even with the help of funding. This is highly unlikely as there are many such companies across the world, especially in China, where IP development is outsourced to. Unless there is demand for home grown products, but is a risky affair because of the nature of high volume low margin business in Indian retail. This typically means these companies will be bought out by bigger fish such as a TI or ARM or Analog Devices. We predict that not many will generate great buy out stories like Sling Media. Remember them! This company developed the software and hardware for ‘placeshifting’ media was bought over by Echostar for 13 times its revenues’, the deal size was estimated to be $ 380 million.

Developing core IP has always been the strength of our entrepreneurs and yes they can venture in to making their own products because there is a need for Indian based problems such as healthcare, telecommunications and energy solutions. May be this will be big in 10 years. However from the experience of Tejas Networks, which realizes now, that 10 years after its operations its revenues are yet to touch Rs 1000 crore. It is now actively seeking dollar revenues to increase top line. We at Viedea expect that raising money will be difficult for semiconductor companies, but the space will see a lot of M&A activity going forward.

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About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

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