“Is there still money to made as an Analog Entrepreneur”
As we begin a new year in 2007 many analog professionals are evaluating their career options. As such, many are probably wondering whether there is still money to be made by starting their own venture. Before we look at the numbers and financial aspects I feel it is important to look at the criteria for building a successful company beyond the obvious financial aspects. Similar to the game of baseball a startup begins with four bases: 1st base is a market opportunity, 2nd base involves a customer need, 3rd base is the barriers to entry, and finally home plate is the business strategy. Additional elements for a successful startup: an experienced executive team who have worked together, a straight forward business model and exit strategy, excellent market timing and a cash efficient “Go to Market” strategy in a “High Growth Market”. Is it easy to succeed in today’s environment, NO, but then was it ever easy? It is important to pick the right horse and avoid areas that involve standards that have unpredictable outcomes. Yes there are a few examples of startups in recent years that have succeeded in standards based markets, but they are rare. Either way it is critical to be the best in whatever market is chosen because competition will be keen in any market whether you are competing with other startups, or larger more established companies! Time to market is King whether you have bleeding edge technology or a better mousetrap to existing technology. In either case you must have zero tolerance for error, since you will be resource limited. Many big potential customers will be reluctant to work with you for fear that your future is at risk. You must have a turnkey solution. A demo board is not a SOC in a system. There are mentoring services available from many Universities that will work with potential entrepreneurs to aide in their success.
The strategy for funding should be evaluated prior to approaching potential investors. The options include self-funding, angel investors, strategic partnerships, DARPA and Venture Capital. When considering Angels and VC funding it is wise to select those that can open doors and or help deliver something besides dollars. When assembling a BOD’s you must understand that board dynamics are critical and the success of the company can be affected by a board that disagrees on the strategic direction of the venture.
Now let’s shift to the monetary aspects. As of November 1st, 2006 125 Fabless companies received private capital, totaling 1.7 billion as compared to the same time last year, 121 deals totaled 1.4 billion. The industry is on track to raise more funding dollars year over year, however the number of deals is expected to stay flat in year over year growth. The numbers reflect the industry as a whole to include all semiconductor events. Mergers and Acquisitions in the Fabless world totaled 8.8 billion as of Nov 1st, a 132 % year over year increase. These numbers include the 5.4 billion AMD acquisition of ATI. If one takes this acquisition out of the picture the M&A dollar amount falls 11% year over year and the number of deals is flat. Since 2001 the 1st round funding looks like this:
51 31 55 59 50 25
01 02 03 04 05 06
The exits over the last 5 years look like this:
21 17 26 30 27 16
01 02 03 04 05 06
Now if we look at where the money goes on an exit:
50M Investment 100M exit 75M 500M
Investors 50M 25M 450M
All Founders (12%) 6M 3M 54M
Each Founder (4) 1.5M 0.75M 13.5M
Employees Total (15%) 8M 4M 68M
CEO/VPs/TAB/BOD (66%) 5M 2.5M 45M
Each Designer (20) 0.13M 0.064M 1.1M
For 2 rounds (30M)- Founder makes $2.6M 4 rounds (80M) $0.5M
*Numbers provided by: Henry Chang Designers Guide Consulting*
When we look at funding in the analog space most startups will require from 30-75 million to bring their 1st product to the market. After 3 good rounds of funding the founders will retain from 10-12 % of the company. This equity can obviously amount to a decent amount on even a 20-50 million dollar acquisition. Preferred Stock is returned first and included in common stock distribution. In the analog space you should be expecting a 6-7 year period for a good exit, and in the process focus on the means not the end! If you look at the successful startups’ in the analog space over the last 5 years those that enjoyed the best success were the 1st to ship in a large market, stayed focused, but remained agile, and were able to drop prices faster than their competition. They also provided differentiation in their products/solutions and continued to drive technology leadership. Most importantly, they have continued to build great teams with talented professionals and engineers.
So you ask yourself is this a viable career choice? As someone who has worked with, and placed a great number of analog professionals in my career; I can without question say that the benefits outweigh the drawbacks! Many feel that the risk is much greater than working for a big company. My experience has shown that the risk factor is about equal. Your biggest investment is time. Yes it is much more work and in some cases, a lot more stress, but in return most will tell you that it is a lot more fun! I am often asked whether it is better to join early or late in a startup? My answer would be either one, but what is more important than the potential financial gain is what the experience does to aide in your career progression! It is all about the journey! Most of the entrepreneurs I have dealt with over the years have told me that they learned much more from their mistakes’ than from their successes. If you look at the long term you will be rewarded over time!
