This dynamic is the reason that most new products are introduced by startups and then acquired by larger companies with bigger channels once there is market demand. But Rajeev admitted to me that they have had more success with internally developed products than with acquisitions, partly because he is outgunned financially and so cannot acquire startups that have established successful products.

Magma’s original BlastFusion product was introduced while Magma was still a startup, so that doesn’t count. But Magma has successfully introduced Finesim, a circuit simulator, and various analog products under the Titan umbrella. Rajeev claims that if Magma’s circuit simulation and analog product lines were a separate company, they would be the 5^th biggest EDA company, larger than Atrenta and Apache who are both rumored to be around $40M in revenues.

I asked Rajeev how he had succeeded in getting his salespeople to sell new products. The answer turned out to be two-fold. Firstly, get some new salespeople. Magma turned over almost all of their salespeople to get a team that was up to addressing the problem. Then Rajeev had the team working on the new products report directly to him, and he would take them into accounts. Rajeev confessed that he actually learned this from Gerry Hsu. The salespeople didn’t always like it but the person they had to argue with was the CEO not some engineering director with no power. It takes that level of focus to get a new product into a channel with lots of alternative products to sell and renewals to book.

Rajeev told me he has been doing this with a soon-to-be-announced product and is hoping for similar success. I guess we’d better watch this space.

Interestingly, with Tekton, their new timing analyzer, he didn’t take this approach. Since Tekton is tied tightly enough into the mainstream place and route business, and since Synopsys can use PrimeTime as a weapon (somehow place and route plus PrimeTime doesn’t seem to cost much more than place and route alone) individual salespeople only needed tweaks to their commission plans to have them sell it aggressively. Apparently now 5 of the top ten semiconductor companies have it in qualification right now.

Talus, the follow-on to BlastFusion, was slow to get adopted. But this time it wasn’t a channel issue. As essentially the next version in an existing product line it shouldn’t require special focus. Rajeev admits that when it was first introduced a couple of years ago the 1.0 version had a lot of problems and was simply behind in routing technology, which took time to resolve.

Over the last few years they revamped their product into a single integrated platform which was first released in 2004. I talked with Jeff Hardison and Bob Potock last week about their business strategy and their results.

The money quote is that last year over 500 US companies (companies, not individual engineers) switched to Altium Designer last calendar year. And they are strict about what counts as a switch: the company was not a customer with the older product, they were using a competitor’s tools (Mentor, Cadence or Zuken, who I thought was no longer around). In a few cases they counted separate divisions of large companies as separate companies but it is not material to the 500 number.

This is obviously a very nice result to have. Anyone in EDA would love to have 500 new customers switch from a competitor to their product. So they decided to survey them to find out why.

Since Altium Designer sells for $4,595 including the entire platform incorporating tools for PCB design, FPGA design, embedded software, IP delivery, verification, change-control and more, price would be one likely reason. A few people identified price but, by and large, people switched because Altium Designer is better in some dimension: easy to switch, easy to use, unified platform. Once these people had switched then a whopping 84% reckoned that their productivity had improved by at least a factor of 2, and nearly a quarter of them reckoned it had improved by a factor of 4 or more. One thing that seems to help a lot in ramping up on the new tool is the 3-400 “how-to” videos that Altium has available.

By any measure these are impressive results. If a “company” averages (I’m guessing) 5-10 engineers then 500 companies is 2,500 to 5,000 new individual users (out of 40,000). And remember, this is in the US alone. Most EDA companies are struggling to maintain their revenues an to open new accounts in the current downturn, making these numbers more remarkable.

Their competition is basically Mentor and Cadence with tool-chains that have been put together over the years by acquisitions. By contrast, Altium bit the bullet and built a completely new fully integrated architecture where everything is held consistent. For example, if you re-assign a pin on an FPGA you’d like that to automatically update things inside the FPGA (so that when the FPGA is routed it uses the new pin assignment) and outside on the board (so that the PCB traces correctly go to the right pins). In Altium this indeed happens. In other tool chains, not so much. You can even buy add-on tools to take care of this deficiency.

It reminds me of the tools we built from the ground up at VLSI which had many of the same attributes although with less automation (computers and databases were much more primitive 20 years ago). I’ve argued before that for most people, a Ferrari is better than a Formula-1 racecar; a fully integrated turnkey solution that just works and is an order of magnitude cheaper. Altium are delivering on this but with one big difference: the Ferrari goes faster than the F-1 racecar.

One thing that I immediately thought of is that if Altium sells their software for $5,000 and if almost everyone is listing better rather than cheaper as the reason they switched then aren’t they leaving money on the table? It reminds me of Model Technology in the early days when it sold a VHDL simulator for about the third of the cost that Cadence and Synopsys were selling Verilog simulators. They had the best VHDL simulator out there and I’m convinced they’d have sold almost as many at twice the price.

Well, I’m not going to do any more of Altium’s marketing for them but it is nice to see a company focusing on the 95% of designs that are not SoCs and disrupting an established market both from below, Innovator’s Dilemma style with a lower price point, and from above, delivering a premium product.

The business side of the acquired company has a different set of dynamics. They only have to cope with running the existing business since any integration won’t be available for sale for probably a year after the acquisition. The basic strategy is to take the existing product that has presumably been selling well, and make it sell even better by pumping it through the much larger salesforce of the acquiring company.

The big question is what to do about the salesforce of the acquired company. A big problem is that there are really two types of salespeople that I like to call hunters and farmers. A startup salesforce is all hunters. A big company salesforce is all farmers. Some individuals are able to make the transition and play both roles, but generally salespeople are really only comfortable operating as either a hunter or a farmer.

Hunters operate largely as individuals finding just the right project that can make use of the startup’s technology. Think of a salesperson trying to find the right group in Qualcomm or the right small fabless semiconductor company. Farmers operate usually in teams to maximize the revenue that can be got out of existing relationships with the biggest customers. Think of Synopsys running its relationship with ST Microelectronics.

Given that most of the hunters are not going to become good farmers, or are not going to want to, then most of the acquired company’s salesforce will typically not last all that long in the acquired company. But they can’t all go immediately since they are the only resource in the world that knows how to sell the existing product, that has a funnel of future business already in development and probably have deals in flight on the point of closing. One typical way to handle things is to keep some or all of the existing salesforce from the acquired company, and create an overlay salesforce inside the acquired company specifically to focus on helping get the product into the big deals as they close.

The challenge is always that the existing salesforce doesn’t really want a new product to introduce into deals that are already in negotiation. They have probably already been working on the deal for six months, and they don’t want to do anything to disrupt its closing. Adding a new product, even though it might make the deal larger, also adds one more thing that might delay the deal closing. The new, unknown or poorly known product, might not work as advertised. As I’ve discussed before, big company salesforces are very poor at selling product where the customer isn’t clamoring for it.

So the typical scenario goes like this: the small acquired company salesforce is sprinkled into the big acquiring company salesforce for a quarter or two to make sure that initial sales happen and so that the farmers learn how to sell the product. After a quarter or two, the hunters will either drift away because they find a new startup opportunity, make the transition to being farmers in their own right (they may have been  at some point in their career anyway), or else they fail to make the transition and end up being laid off.

AEs have a lot of options in their career path. As they become more senior and more experienced they have four main routes that they can take. They can remain as application engineers and become whatever the black-belt AEs are called in that company, be the guy who has to get on a plane and fly to Seoul to save a multi-million dollar renewal. They can become AE managers, and run a region or a functional group of AEs. They can move into product marketing, which is always short of people who actually know the product. Or they can move into sales and stop resenting the fact that when the deal closes, for which they feel they did all the work, the salesperson makes more than they do (and usually discover sales is harder than they expected).

In a startup, in particular, the first few AEs hired can be the difference between success and failure. The first release of a product never works properly, never quite matches what the market need is and is simply immature. The AE has to keep the customer happy by substituting their own expertise for the deficiencies of the tool while at the same time conveying back to engineering the improvements that are required. Most startups are attacking some sort of walled city, in the sense that there is an incumbent tool/methodology that is already in use, and the startup has to prove that they are better. In fact, not just better, compellingly better. The initial value proposition for most startups, when you look from the 10,000 foot level, is that it is riskier to stick with the existing methodology rather than trust the startup and try the new technology. Getting the customer decision-maker to that point is a mixture of technology (it has to work well enough) and trust in the AE (whatever happens, this guy is going to be there for me). Both factors have to be there to close those so-important initial orders because no matter how good the technology looks, the customer knows that the tool is not mature and might fail at any moment.

It’s been interesting looking at the downsizing of GM and Chrysler’s dealer network. It seems that part of the reason that car companies sell through independent dealers is that in the early days, nobody would buy a car from halfway across the country without a local guy in-town they trusted (and the situation got locked in place because those local guys became the richest people in town and got the states to pass laws that they could never be designed out; it almost every state it is illegal for GM to sell you a car directly). But that trust issue is just like the AE issue. Customers wouldn’t buy a car (tool) from a startup without a dealer (AE) too. It didn’t matter how good Ford’s car appeared to be in the showroom; in 1930, nobody trusted it not to break frequently (a good assumption) and they needed to trust that their investment was going to continue to be good.

AEs are really hard to find for a startup. Good AEs are pretty highly compensated, and so it is hard to match their salary, so it takes a lot of stock to makeup the difference. I did some consulting for a semiconductor equipment company once and they had an EDA product but they failed to hire a good AE since their own AEs were paid a lot less than a black-belt EDA AE and their salary policies were too inflexible. Good AEs are like gold and if you don’t have them you don’t get any gold.

When I was at VLSI Technology, we wanted to standardize on a single Verilog simulator and we had decided that it would be ModelSim. So we wanted to negotiate a deal for using ModelSim throughout the company. At the time, Mentor had already acquired ModelSim but it was still sold partially through the old ModelSim channels, which were distributors and VARs (value-added-resellers). I don’t think ModelSim ever had any direct sales force. We met with our Mentor account manager.

Mentor basically refused to do any sort of global deal because they felt unable to go around their distributors in each region; we would have to do a separate deal with each region. Also, licenses sold in one region would not be usable in other regions since the distributor/VARs provided first line support. The US alone was several different regions so this wasn’t very attractive.

Part of the reason for doing a global deal was that we could get better pricing, we thought, since Mentor’s costs would also be lower if we wrote one contract for a large amount, as opposed to negotiating lots of smaller contracts with each region.  We also didn’t want to have to worry about where a license was used, we wanted a certain amount of simulation capacity for a certain number of dollars. Internally we didn’t even track where tools were used. There is always some issues about using licenses in regions other than the one where they were sold. Firstly, the salespeople get annoyed if someone in region A sells a lot of software that is largely used in region B, especially when the salespeople for region B starts to get lots of calls from “their” customer. Even if the customer promises that all support will go through region A, this usually doesn’t stick, especially once different languages are involved. It is just not credible that all Japanese customers will be supported through, say, Dallas, whatever the software license says.

It can be a major problem when the internal scaffolding of the sales organization shows through to customers like that. “I can’t sell you that because I won’t get any commission” is not a very customer-focused response. You get the same problem, on a smaller scale, in many restaurants if you ask someone who is not your waiter for another glass of wine. The server won’t ignore you totally but they won’t bring the wine either, just tell your server if they remember.

Whenever possible, you want your channel to look as unified as possible to the customer, no matter what battles are going on internally. Like a swan, serene on top and paddling like hell underneath.

At the other extreme, my girlfriend works for a medical education company. It’s largely grown by acquisition but has the (to me insane) strategy of keeping each company’s sales force and branding intact. So any given hospital may have half-a-dozen people calling on it, selling them different products under different brand names, but from the same company. The financial inefficiency of doing this is huge, and as more and more of their business moves into the electronic space and is integrated into electronic medical record systems, more and more of their business will be through indirect channels in any case. But they don’t see this as either inevitable nor a good thing (since it is less profitable) and worry a lot about channels that conflict with their own salespeople. Some of their competitors have bitten the bullet, got rid of their direct sales force and only sell indirectly. Lower costs, one brand name, and no channel conflict. The straps of their compensation scheme aren’t showing.

As for VLSI and ModelSim, we ended up doing a deal with another company, Cadence I think. It’s not just a minor inconvenience to let your sales compensation drive the business. It can drive it away.

First, cost. Each channel costs money. Obviously a separate direct sales force, as Cadence once had for the Alta Group (its system level tools), is expensive. Less obviously, even a distributor or reseller has cost too: upfront cost in training them and ongoing cost in supporting them and in the portion of each sale that they retain. At the very least the separate channel needs to be more productive than it would be to simply sell through the existing channel. By productive, I mean delivering more margin dollars. Sales might be higher with the separate channel, but sales costs might be even higher still making it unattractive. That is one reason that typically when an acquisition is made, the sales force from the acquired company is folded into the sales force for the acquiring company (usually with some of the lower performers being surplus to requirements) rather than being ramped up aggressively as a separate channel.

The second issue is reach. The existing sales force sells to certain customers, and in fact to certain groups within those customers. It will be hard for an existing sales force to sell a new product if it has different customers or even completely different groups within those customers. Their “rolodex” (or CRM system) isn’t any use. They are not already on the right aircraft, they are not already going to the right meetings. In this case, that militates for having a separate channel.

The third issue is conflict. So-called “channel conflict” occurs when a customer might be able to purchase the same product through more than one channel, specifically more than one type of channel, such as direct from the company or via some sort of reseller. This has impact on pricing in a way that might have downsides. For example, go up to Napa Valley and visit a winery. For sure, the winery will be very happy to sell you a few bottles of wine. Since they don’t have any middlemen and have a huge amount of inventory (they don’t just have the few bottles in the store, they have hundreds of barrels of the stuff in the back) then surely they will sell you the wine for less than anyone else. But, in general, they will sell you the wine for the highest price anywhere. If they sold it for less, they would make more money at the winery but they would risk having distributors and restaurants refuse to carry it. In EDA, if there is a product available through distribution and direct, then the direct channel cannot routinely undercut the distribution or the distributor will soon stop actively selling.

The fourth reason to have a separate channel is when the market demands, or the company decides, that it must transition its sales from one channel to another. Maybe they decide to move from direct sales to only doing telesales or only taking online orders. Or perhaps they decide that the day of a standalone product has gone, and they will only be able to sell integrated with a partner going forward. The channel must switch from however they sold before, to simply relying on the partner to sell their product and getting their share of those sales (and, presumably, enlarging their partners market in some way or else the partner wouldn’t be interested). I’ve talked before about how in EDA OEMs only work when the product is actually a component, since otherwise the customer will always want a direct relationship with the real seller. But if you do have a component, rather than a product, you must sell through an OEM type of license (as do companies like Verific or Concept Engineering).

Finally, disruption. If you have a product that is disruptive you have to have a separate channel. Disruptive, in the Innovator’s Dilemma sense, means (usually) that it is sold at a low price point to people who are not served by existing products, and where the low price point product is expected to improve fast and gradually swallow most of the market. Think early PCs versus minicomputers or teeth-whitening strips versus dentist’s providing whitening service. The existing channel is threatened by the disruptive technology, may not even be able to cover its channel cost (think of your dentist selling you teeth whitening strips you could just pick up in Longs) and will be unenthusiastic about selling it compared to more profitable lines. If you are going to be brave enough to try and kill your own baby, then you need separate organization for the baby and the killers. Sometimes, moreover, the disruption is the channel itself (Amazon and bn.com or, for a historical example, Sears starting to sell by catalog as well as department stores). This means a new channel by definition.

EDA has rarely had a separate sales force, since it is just too expensive. One that I mentioned above was Cadence’s Alta Group. For a period that had its own sales team and was successfully growing revenue. But it was expensive and Cadence decided to fold it back into the main sales force. Sales declined and Cadence ended up “selling” that part of the business to CoWare (which you can regard as one way of going back to a separate channel).

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When you put together a spreadsheet to show how the bookings will build up, there are two factors to which the amount of money turns out to be very sensitive:

• How long after you hire a salesperson before they start to produce revenue?
• How fast does a salesperson ramp up to “full power”?

The answer to these two questions governs how much you need to invest in a sales team before they are a net positive for the company, and the total and timing of that investment governs how big a hole you have to cover and thus how much money you need to raise.

You might think that how big you plan to get is a critical variable, but in fact the answer is about a $50M run-rate after 5 years. If you don’t have a plan like this then nobody will fund you (they probably won’t anyway at present, but let’s leave that to one side). You almost certainly won’t grow that fast, and everyone knows it, but they will “take a haircut” to any numbers you give them anyway, so you’d better play along and give them big ones.

Other assumptions you’d better bake in. Any bookings you have will come in the last week of the quarter. This means that any cash associated with that order will not come until the following quarter. So every quarter, for every sales team, you need to pay all their salaries without the cash from the business they are generating that quarter to offset those expenses.

Each salesperson needs two application engineers to be effective. Or at least 1½. This means that a sales team costs approximately $800K per year in salaries, travel and so on, which is $200K per quarter, perhaps a little less if you don’t have the full 2 AEs per salesperson.

As for sales productivity, at capacity a sales team brings in $2M/year. If you put in much more than this then you are simply being unrealistic. If you put in much less you’ll find that the business never gets cash-flow positive.

EDA tends to have a 6 month sales cycle. So normally  a new salesperson won’t close business in less than 6 months, and probably 9 months (3 months to understand the product and set up initial meetings, 6 months of sales cycle). I like to use a ramp of $0, $0, $250, $250, $500 for the first 5 quarters, which assumes a salesperson sells nothing for two quarters, is at half speed for two quarters and then hits the full $2M/year rate. Later this may be conservative since a new salesperson can inherit some funnel from other existing salespeople in the same territory and so hit the ground if not running then at least not at a standing start. In the early days it might be optimistic since I’ve assumed that the product really is ready for sale and it is just a case of adding sales teams. But realistically it probably isn’t.

So those are the variables. In 5 years you need to be at $50M which means about 25 sales teams at the end of year 4 (because only those sales teams really bring in revenue in year 5). Some may be through distribution, especially in Asia, but it turns out not to make all that much difference to the numbers.

In the meantime, the rest of the company has to be paid for and don’t directly bring in revenue. So if you ramp sales too slowly, the rest of the company will burn more money in the meantime. This makes the model less sensitive than you would expect to the rate at which you hire sales people, within reason.

If you hire people too fast on day one, then the hole gets huge before your first teams start to bring in any money to cover the cost of the later guys. You need to get to about $7M of bookings before things get a bit easier and the early salespeople are bringing in enough to cover the costs of the rest of the company. However, if you bring in people too slowly then you will not get to a high enough number in the out years. The trick is to hire in a very measured way early and then accelerate hiring later. This will give a hole of about $4-5M meaning you should raise about $6M to give yourself some cushion to cover all the inevitable delays.

At first glance, there are a lot of parallels with EDA. Most notably the same customers, the same technology treadmill and a small number of large companies without a lot of differentiation in their product offerings. But there are big differences. For equipment, the innovation often comes in the big companies, which have shown themselves capable of both developing innovative technology (involving not just optics and hardware but also a huge amount of complex software—60% of the engineers at a typical equipment company are software and algorithms) and also getting that technology successfully into their channel. Big EDA companies are not good at that. Why the difference?

Semiconductor companies know that they need both new equipment for the fab and new design tools for their design groups in order to bring a new process node online. In general, the most advanced fabs (such as Intel or TSMC) work very closely with the equipment vendors on the spec of new equipment and then on ensuring that the equipment works properly in the new environment. If you think it is hard to get your hands on a netlist for a next generation design, try getting your hands on some test wafers when most of the equipment does not yet exist. And when the equipment is ready for production, the fabs have no expectation that they will get it for free in return for this work, though they will certainly drive for deep discounts. As Lance said, sometimes the customers think “JDP” stands for “jumbo discount program.”

One big difference is the way equipment is sold. Of course it is hardware not software, which means that neither the salesperson nor the buyer know the exact incremental cost and so what the profit margin is at any particular price, although Intel actually invests in a “should cost” program to work out what they think a piece of equipment should cost to give them better negotiating leverage.

Another big difference about hardware is that it has lead-time. If you want to open your fab by such-and-such date then the equipment needs to be ordered by a much earlier deadline. This makes the negotiation much more balanced: the equipment vendor can delay knowing that the clock is ticking. Yes, they want the order but the fab absolutely has to close a deal by a given day. The only time a similar situation would exist in EDA is if a big semiconductor company were stupid enough to leave negotiating a new deal until right up to the last day of the old deal when all its existing licenses would expire. Then the EDA company could just delay too. This advantage had decreased in recent years as the customers place a larger percentage of their orders within lead time (to try to transfer the inventory risk to the vendor), but it is still not a bad as with software.

The other difference about equipment is that it really is a one-time buy, a true “permanent license.” You buy a piece of equipment this year and you pay for it this year. Next process generation you don’t  “rebuy” all your existing equipment with just a soupcon of new stuff such as better optics. But with software you do. So even though a new piece of equipment may contain a lot of the previous generation in its design, the semiconductor company doesn’t expect to get that bit for free on the basis that they already paid for it in the previous generation.

The way EDA works, even the old days when EDA still had a hardware business model and sold permanent licenses, there was always a debate as to how much of a new product was incremental (thus expected to be included as part of maintenance) or was a new tool (thus required a new permanent license). Today, with time-based licenses, much of a salesperson’s quota may be “re-selling” the existing capability. When so much is riding on just keeping the customer on-board using the existing tools, the salesperson becomes very risk averse about selling new products. Unless the customer insists on buying, it is only a small amount of incremental revenue for possibly a large amount of incremental problems. From the salesperson’s perspective better not to include it in the deal at all. For the EDA company as a whole, in the short term and looking at just that one deal, this is rational. It is only in the longer term and in the aggregate that not getting new products into the channel is a slow death. Equipment companies often structure their sales incentives around penetration, share, and adoption of new products. More insidiously, this style of business (all your money for all your needs satisfied) means that EDA does not attempt to sell to value, does not attempt to increase the meaning of “all your money.” Customer companies, who know the value, make it hard discover for the EDA company. For example, it is hard to find out how heavily individual tools are used. Equipment for 45nm is harder to engineer than it was for 180nm and so everyone expects it might cost more. (It is not all one-sided, EDA companies don’t have to worry about wafer size changes—the equipment industry still hasn’t made back the cost of changing from 200 to 300 mm.)

An equipment salesperson is more like an EDA startup salesperson. If he or she doesn’t sell new equipment, there isn’t anything else to sell. Very little ramping of production goes on except in the latest processes. There is almost no market for new 90nm steppers today, for example (there’s probably a second-hand market though, they used to advertise that sort of thing on billboards along 101 between San Jose and San Francisco).

Little differences in the details seem to have a huge effect of the business. The fact that there is no concept of a software upgrade in equipment, the fact that hardware is solid and has real cost, that it has lead-time, has meant that equipment companies cannot go to zero on pricing, have to increase prices since their costs increase, and have to work closely with early adopters to mature the product. EDA companies have given up trying to sell the value of new products and so have given up trying to grow their customers budgets. So they don’t grow, and EDA is probably smaller than it was five years ago (if we exclude IP).

Where large companies have a problem is that they are very poor at introducing new products into their channels. They have large efficient sales organizations but those organizations are geared up to closing deals with customers for products that the customer already knows it wants. Unfortunately, when a brand new product is introduced, there is an attitude among the salespeople that “he who goes first loses.” But just as the Luddites really were right that automatic looms would put them out of business, the first person in a large company to sell a new product really does lose. There will be problems with the product that will tie up their application engineering resources for months, and potentially a large multi-million dollar deal will be held hostage to problems in a single copy of a hundred-thousand dollar tool. Better simply not to sell the product until enough other sales have been made for it to be mature. But with every salesperson taking this attitude, no sales occur.

This can extend even to products that are acquired. When Cadence purchased Ambit’s synthesis product line, it was obviously very strategic for Cadence salespeople to sell it aggressively. If they were successful, it would start to cut off money flowing to Synopsys and even if they were less successful, they would force Synopsys to circle the wagons to protect its Design Compiler franchise and so have less effort available to put into threatening Cadence’s huge place and route franchise. But Cadence salespeople would not. They had big quotas at big semiconductor companies to close, and their focus was to let Synopsys have synthesis and try and close a deal to supply everything else. Selling synthesis against Synopsys required extra effort and the payback of a few experimental licenses would not move the needle on their quota.

Another product from my time at Cadence was called Heck (at least internally, I forget what unmemorable name it got given externally). It was a formal verification tool built on some technology developed at Cadence Berkeley Labs. To tell the truth, I’ve no idea whether it was any good or not, but since the salespeople refused to try and sell it we never found out. In the end Cadence acquired Verplex and the Conformal product line that customers were already starting to adopt.

Very few products have been successfully introduced by large EDA companies (once they have become large). By successful I mean built up into $100M per year businesses. And by product I mean a genuinely new product line, not a new version of an existing product. The only one I can think of is Calibre. This was developed over the years inside Mentor and somehow survived being canceled for almost a decade before coming to dominate physical verification. Cadence helped by making a huge misstep. They tried to protect their Dracula franchise by making their hierarchical DRC Vampire require incompatible rule decks. Mentor had no such qualms and as a result the obvious upgrade path from Dracula was to Calibre not Vampire.

Synopsys made PrimeTime a big success, but the story is complicated by the fact that they acquired Viewlogic and with it Motive, the market leader in static timing. They then shut down Motive and transferred all its customers to PrimeTime. But undeniably they did manage to get their salesforce to sell it.

So I think that it is not so much that large EDA companies are incapable of innovation. They do it all the time. But their salesforces are reluctant to sell any product for which there is not already strong market pull. Marketing in EDA is unable to create that demand either, which is a different story.

However, startups are different. The salesforce will sell new products because the salesforce typically has precisely one product to sell, and it is new. They are not really the same sort of salesperson either. Startup salespeople are more like hunters whereas large company salespeople are farmers. It seems to take that combination of single mindedness in the salesforce and an entire company whose success depends on getting those initial customers to adopt the product. Once customers start to clamor for the product, it is the moment for a large EDA company to acquire the startup and the huge machine of their salesforce can drive the bookings number up very rapidly.

But enough software really means enough hours of use of the software. For a large EDA company, most of the money comes from a relatively small number of large customers, and they optimize their use of licenses in server farms, sharing licenses world-wide and so on.

But enough hours of use of software in turn really means that either the software must run for a long time (like place and route or RET decoration) or else that customer engineers must sit in front of it for a long time (like a layout editor).

Other tools suffer from what I call the “Intel only needs one copy” problem. They have a hard time building license demand naturally. This is less of a problem in a startup, who are quite happy in the early days to sell one copy to everyone, but to get a good growth trajectory it is necessary to build on the beach-head of those first licenses and proliferate widely into at least some of the accounts.

If license demand isn’t built naturally then it becomes necessary to attempt to do unnatural things like try and charge per tapeout, or try and license on a per-named-user basis, or try and charge a royalty. These are all possible but at the very least the sales cycle will stretch out for a startup, and it will run out of cash, or for a large company it becomes too complex to include a weirdly licensed tool into a large contract (which, incidentally, is also one reason that OEM deals never work in EDA).

This is one of the big challenges of the ESL market. The tools are only needed occasionally, don’t run for a very long time and don’t require users to run them interactively for long periods.

Bottom line: it is really hard to sell a tool with an unexpected business model, which for EDA means some sort of floating license for a period of time. A nice analogy is the restaurant business. When you go to a restaurant you expect to pay depending on what dishes you order. That’s how restaurants work. But in fact most of a restaurant’s costs are fixed: the rent, the employees’ salaries, utilities, advertising. So rationally a restaurant might charge by the minute no matter what you eat. That changes things a bit (caviar is cheap, that espresso after dinner is really expensive) but even so I suspect you’d have a hard time running a business that way. It’s just not what the customers expect.