Will there be more startups in EDA?
Long considered the lifeblood of innovation, their focus, their exit strategies, and their funding sources are changing.
DACeZine sat down to discuss startups and entrepreneurship in the EDA market with some industry exponents each of whom have launched more than one in their careers. Participants to the discussion were: Rajeev Madhavan, chairman and CEO of Magma Design Systems; George Janac, CEO and founder of Silicon Navigator; Andrew Yang, president and CEO of Apache Design, and John Sanguinetti, chief technology officer at Forte Design Systems. What follows are excerpts of that conversation.
By Ed Sperling
Q: In the past, the majority of startups in electronics occurred in the EDA sector. What's so unique about this sector, and will the trend continue?
Madhavan: In EDA, the most important thing is the experience. You do not need a bunch of guys with different talents on a large team. As a result of that, things can be done quicker than in a lot of other areas. It's much easier to get the startup off the ground because of that. In addition, there's a lot more money in EDA from venture funding and other sources than there used to be 10 years ago.
Sanguinetti: Ten or 15 years ago, it didn't take as much money as it does today, though.
Madhavan: But now there also are a lot more entrepreneurs putting money back into EDA. That makes it a lot easier to get access to capital. The success of a few entrepreneurs makes it easier to get money—and to get some advice, as well.
Yang: That is an 'Easy come, easy go' model. It's easy to come into the market, but it has been easy to go out of business as well.
Q: Does it make good business sense to fund these companies?
Madhavan: That's a question that isn't always asked.
Sanguinetti: People like us are easy marks for other guys who are trying to start companies. It took me a long time before I got the point where I said 'No' to someone asking for funding.
Janac: The biggest change in EDA is the exit strategy. That eventually will change the capital that goes into it.
Q: How has it changed?
Janac: The number now is 2x. I'm paying some of the same people twice as much as I was paying them 10 years ago. One of the nice things about EDA is that you don't need an army of people to develop stuff. You do need an army to run the business.
Sanguinetti: But haven't the problems gotten harder?
Madhavan: The problems have gotten harder and the channel has gotten more expensive. Our customers expect a lot more in support than they did 15 years ago.
Q: What is the exit strategy for today? Who has gone public besides Magma and Verisity?
Janac: There may be two or three companies that could do it, but the number is now about $40 million in revenue.
Q: Is that still the number, or has it gone higher than that?
Madhavan: It's higher now. You now need to spend more money on lawyers and accountants with Sarbanes-Oxley.
Yang: About five percent of the profit margin goes to the IPO process, so if you can't get above 15 to 20 percent in your operating margin it's very difficult [to go public]. What's changed is that several years back you needed a big idea to take on a bigger TAM (total available market). But it's a maturing industry, so it's very difficult to get a big idea today. Entrepreneurs should focus on differentiable smaller ideas. They need to make money at them, be successful with them, and have several of them. Combined together you can do just as well.
Q: Will that attract the same caliber of entrepreneurs if the return on each investment isn't as high?
Madhavan: There's nothing wrong with five or six people getting together and selling the company for $20 or $30 million. There will be fewer very large acquisitions, and fewer at the lower end as well, because there nobody wins from an investment or entrepreneur perspective. But that also means you can't take too much money in outside investments. You can't take the highest amount available in series A, B and C and still be financially successful.
Janac: Nowadays, there are a lot of things you have to question if you're going to fund $5 million or $10 million in EDA because you need to know what you're going to get out. Acquisition is the most likely exit strategy. IPO is the most difficult. But there is going to be a new class, which is cash flow companies. So there will be a whole other set of startups that will not have an exit strategy.
Sanguinetti: In EDA, there are very few companies that can survive on cash flow. The only one I can think of is Denali.
Janac: The market isn't there yet. But it will be soon.
Madhavan: If you're a successful company generating cash, is there a big value in going IPO? Why not pay dividends to people?
Janac: Investors aren't ready for that.
Madhavan: Maybe we need a new class of investors.
Q: When all of you started down the entrepreneur path, was there a bigger reward at the end—or at least the promise of one—than there is today in EDA?
Janac: Even at $30 million, the founders and the employees will make over $1 million.
Yang: Financial rewards are not the only motivation in starting companies. It's one of them, but as the company progresses what's more important is to take care of the people to guarantee their financial return. That, along with the passion, is what drives people like us. Being driven entirely by financial rewards is very risky, because that means we tend to make decisions at the expense of other, often more important, factors.
Q: But if you're an entrepreneur, would you go into EDA today or would you go into Web 2.0 or some other nascent market that's ready to explode?
Sanguinetti: If you're an engineer and you've spent your life doing chip design, you're not going to do a Web 2.0.
Q: Agreed, but how about if you're just coming out of school and looking for a specialty?
Sanguinetti: It's pretty unlikely that a 24-year-old entrepreneur is going to come into EDA and be successful.
Janac: Unless they've done their Master's or Ph.D. in the field.
Sanguinetti: That's possible.
Yang: This is an interesting and different industry segment. It requires a lot of hard skills. You don't need an MBA to become an entrepreneur in EDA, but you do need a very deep understanding of the technology and the product trends. Then you need some soft skills to run the business. I don't think a 24-year-old would have those hard and soft skills.
Madhavan: That's why there hasn't been a 24-year-old coming in, taking over, and busting out like Google did. The chips are extremely complex and the customers are extremely demanding. It's not just one algorithm. No algorithm works out of the box in this business.
Janac: There are two dimensions to this problem. One is how to do a startup in an era of mega-bundling, where the big semiconductor guys are going to buy from one vendor. The other thing is what do you fund? One group of startups provides something that the mega-bundlers don't have. Another is focused on something that is deadly competitive. Another alters the game of how EDA will be done. Everything else is a me-too, and it's difficult to figure out how to make money out of this segment.
Q: So what happens to the entrepreneurial talent pool?
Yang: The flip side of solving a difficult problem is that we have to encourage people. Being difficult sometimes is good because it means there is a problem to be solved. It's worse if there were no problem left to solve. That would encourage an exit of people out of this industry.
Madhavan: That brings up another issue. If you're coming out of school, do you choose EDA or something else? In the late '80s or early '90s, we got them all. That's declining now because they might choose research in Web 2.0. That's our biggest challenge. The reality is that Wall Street has not rewarded this industry enough for the amount of work we've done. We need to sell that value proposition. If EDA were to shut down today there would be no chips and no consumer electronics. There's a big difference between the value we bring and the value we derive.
Yang: But is the value measured by how much money we make or the long-term impact on the semiconductor industry? Are you just going in for a quick hit where you take out money and the product never makes an impact? That is not a successful entrepreneur.
Q: Aren't the problems that startups deal with relatively short-term, though?
Janac: No, the problems stick around in this field.
Sanguinetti: The scales change, the levels of abstraction change, but the fundamental problems of analysis and synthesis are always going to be around.
Q: Are the rewards lower the longer the problems are around?
Madhavan: That's the challenge. With the bigger EDA companies, you should be able to develop a lot more profitability. But you have to keep your investments in line with profitability. Because of their investment in new technology, some companies don't have the money to invest in new tools. That's why the investment to re-do the technology is not being made. The evolutionary approach in existing tools by established companies gives entrepreneurs the advantage of developing new solutions.
Janac: Startups are difficult any place where the big guys have a foothold. Five years ago when Magma was building place and route tools, they weren't doing that while no one else was watching.
Madhavan: When we were doing something in physical synthesis, the incumbent players said we weren't making a difference, rather than acknowledging we were and chasing us. There was a lot of denial and complacency going around. They said that what they had was good enough. At any point in time, there may be a startup attacking Magma and I will have to go after it. I don't think that was done to us as well as it should have been done.
Janac: Companies have grown big while their competitors were asleep.
Yang: Our philosophy at Apache has always been to not take head-on competition. That has been a good strategy for us, and it's a good one for entrepreneurs. You need to find a way to coexist and provide a differentiated value.
Q: Didn't Magma use a different approach?
Madhavan: You can take on the big guys, but you need a number of contributing variables to do that. When Magma took on Avanti! that company had litigation mishaps, and the other potential competitors were in complete denial. You need scenarios like that. Do you intimidate companies enough for them to respond quickly? It's very difficult inside big companies to compete against such a threat.
Yang: But you don't want to wake up the giant too quickly. You want to find ways to coexist, and then when the time comes, compete directly. But there are people who start companies to take on the giants.
Madhavan: One part of that is the inexperience of the entrepreneur. The second part is that once you start down that path, your adrenaline is pumping and you can't turn back. That works sometimes, but if your competition has the same level of adrenaline, you're in big trouble.
Yang: That's why big TAM (total available market) doesn't mean a lot if you're only going to get a small share.
Q: Why are entrepreneurs in this market driven to start one company after another?
Yang: For me, I've never worked with the same set of people. Change is a rewarding experience. If you work with the same set of people, it gets really boring. It's a matter of not solving the same problem over and over again.
Sanguinetti: That's something that's important to me, too. When I left Chronologic, I didn't want to do another simulator.
Madhavan: You don't really want to go up against your product. It's not a yardstick you want to measure yourself against. When I left Ambit, I didn't want to compete with them. I stayed away from synthesis for a long period for just that reason. Even when we encourage new entrepreneurs, they have to be addressing something that adds more value. I want this product to be used for every chip. That feels really good. Money is important, but contributing to the technology is also really important.
Yang: I also really enjoy talking to customers face-to-face, listening to their problems, and finding out how they use our tools. That's a great experience. There are a lot of great technologists out there with a deep fear of business. Business ultimately is the ability to talk with customers and gain their trust. That has to go hand in hand with the technology.
Q: Is the EDA entrepreneurial spirit showing up anywhere else around the globe?
Janac: The Valley is a machine. We all could fire up a company here in three or four days. This is the place where you build companies.
Madhavan: The infrastructure is here. The reason it is happening here now is that in the 1980s and 1990s, the best of the best came into EDA here in the Valley. That's not happening anymore. Now, the highest GPA students may be going to Google. The Valley environment will happen in other places, but it will take time.
Janac: I think people underestimate the knowledge leveling of the Web. The U.S. should be very afraid. It's one of the reasons we can do startups with fewer people.
Q: Where is the next big area for entrepreneurs in EDA?
Janac: Mega-bundling is followed by value destruction.
Q: And then what? Reconstruction?
Janac: The value destruction is a shift in underlying businesses. People are either going to be unbelievably smart and compete head on or they will be in the peripheries. The flows are pretty well completed by the four vendors.
Yang: We always look for areas where we can cut the cost for users. That's the ultimate easy entry point. Whether it's yield or cost of implementation or time to market, you have to be able to quantify these kinds of solutions for customers. Just doing me-too with incremental 2x or 3x improvement isn't enough. The market is flooded.
Madhavan: Analog is a phenomenal opportunity. Things have to change in analog. Analog design is 15-year-old technology, and nothing has changed. From the standpoint of our users, migrating IP in digital takes 2 to 3 months. In analog, it could take 9 to 12 months. It's a tough problem. Another growth area is system-level design.
Sanguinetti: It's an abstraction issue.
Madhavan: We have to make that transition.
Q: Isn't it the same issue for both system-level design and analog? They both need a higher level of abstraction, right?
Madhavan: Yes. Some of this is due to a slowdown caused by mega-bundling. That is very bad for the industry. Companies may think they're adding value, but all they've done is lock the customer's budget. There has to be a way to stop this mega-bundling. Without that, it's difficult for people to do these transitions. Change requires money.
Janac: Three or four years from now, much of the funding will not come out of VC funding. It will come out of corporations and EDA itself.
Sanguinetti: You would have said that five years ago.
Janac: No, I don't think so.
Sanguinetti: Five years ago I was asking how people could put money into startups and expect to get it back. The same question is relevant today, and I hear the same answers.
Madhavan: You still have to ask what is your exit strategy. If you are going to kick someone, you need a lot of money, and that's very difficult to obtain today. A lot of investment in this field is not going to happen from big venture funds. There are a lot of DFM startups for example, and investors have not made any money yet.
Janac: There's a lot more investment money coming out of the semiconductor companies today that you don't necessarily see. Five years ago, that wasn't the case.
Q: Is that because it's cheaper to do it with outside people?
Janac: These companies don't have the talent internally. It's too hard to get attention from the really big EDA guys. And they're not sure they want everyone else to have it, so they're willing to create a small team.
Yang: There are many people who really want to start a company, and some of them have good technology. But they have questions about whether they should do it or not. They have a fear of mega-bundling.
Sanguinetti: When I was first getting into this business, I didn't know anything about this industry. My only fear was fear of failing.
Janac: Those are the guys you fund. The ones who are afraid of failing are the ones you want to fund.
Q: All of you have created startups. Would you do another one in EDA?
Sanguinetti: I don't think I have the energy.
Madhavan: I wouldn't do one. I would help a lot of entrepreneurs do it. It's an issue where anything I do has to top what I've done in the past. Topping Magma puts the risk of failure pretty high.
Janac: I have a five-year-old startup, a three-year-old and a one-month-old. I take an idea and help it take hold. I will operate the startups for the first two to three years. Then at that point the teams are in place.
Yang: I would never rule out another one, because I'm thrilled with the ability to talk to customers and work with new people. On top of that, outside of EDA my investments have close to 100 percent failure.
Madhavan: I've been more successful doing EDA than anything else, too.
Q: Is it because you know the market better than other markets?
Yang: It's knowing the customers and the people.
Madhavan: It's the ability to determine where there is value. We know what will work and what won't work.