Seed Money:

"Buddy Can You Spare a Few Million?"

With the new millennium only six months away, this is an opportune time to contemplate new beginnings. This column will focus on semiconductor start-ups, how they secure financial backing and what business models they might adopt if they want to be among the rising chip stars of the 21st century.

While most newly-hatched chip companies have been nurtured by venture capitalists, there have been a handful of IC startups that were bootstrapped with the founders' own money.

Chips & Technologies was a big winner among the self-funded group. It was launched by Gordon Campbell, who left SEEQ Technology to launch Chips. After being snubbed by virtually every VC in Silicon Valley, Campbell decided to go it alone. In only four years, Chips grew from zero to $200 million, one of the fastest-growing IC startups ever. Following a roller coaster ride of decline and then recovery, Chips was acquired by Intel.

Founders' Money

Atmel is another example of making it big without VC money. Greek immigrant George Perlegos couldn't have picked a worse time to seek VC funds-1985, one of the steepest semiconductor downturns ever. But after its founders staked a mere $20,000 of their own funds to open shop, Atmel received a major boost when it landed a development contract from General Instrument in early 1986. That contract eventually garnered $5.1 million. Last year, publicly-held Atmel posted annual revenues of $1.1 billion.

Cinderella Stories

These Cinderella stories notwithstanding, semiconductor startups depend largely on VCs for seed funding and subsequent infusions to carry through to an IPO.

The results of 1999's first quarter of VC funding are in, and semiconductor-related ventures collected just 4% of invested funds in the U.S., beating only the computers and peripherals category, 2%; and the industrial sector, 1%.

"Dot.Com-itis"

What a difference a few decades makes. In the 1970s, biotech ventures were Wall Street's big heartthrobs.

In the 1980s, semiconductors were the darlings. But now, in the late 1990s, the hot VC money is flowing into Internet startups. Net mania reigns in Silicon Valley, where in Q1 this year, 44% of venture funds were swallowed by new Internet-related concerns, followed by telecom, which consumed 23%.

These favored funding vehicles put even more pressure on emerging chip ventures to get the attention, let alone the dollars, of VCs who have been seized with "dot.com-itis."

Excluding EDA tool vendors in the semiconductor-related sector, there were even fewer pure silicon plays receiving VC bucks in Q1. Among the largest recipients in this year's first quarter: Quantum Effect Design (QED), provider of embedded MIPS-based processors, securing $20 million; and StratumOne Communications, maker of ICs targeted at broadband networking, closing a $14.6 million round.

With fewer dollars going to chip makers, who do you call? Creative financing alternatives for IC startups include, ironically, other chip makers. Intel, for example, is slated to disclose a new $300 million VC fund to foster companies that design key building blocks for the next-generation of Intel processors. Actively backing technology ventures is nothing new for Intel, which has stakes in more than 200 firms and holds a venture portfolio worth $2.5 billion.

What will work best in the 21st Century? Probably not your father's IC business model.

The best and brightest-and richest-will probably be fabless, possibly chipless, and broad-niche-market oriented. They'll discard the "not invented here" attitude, offer system-on-chip solutions and rely heavily on third-party intellectual property cores.

Huge Applications

They will pioneer potentially huge applications: perhaps artificial intelligence, maybe micro-machines or some as yet-unknown convergence of PCs, the Internet, telecom and consumer electronics.

Let the Millennium Games begin!

Paul Plansky operates Genesis 3, a public relations and marketing agency in Palo Alto. A Silicon Valley veteran, he spent many years as a trade journalist, first at Electronic News, later with his own newsletter, Inside Chips, and then at HTE Research. Contact him at pplansky@att.net or phone 650.325.7625.