The lead investors were Evans and Sutherland (the graphics and flight simulator company in Salt Lake City) and Hambrecht & Quist (one of the earlier VCs).

VLSI had an incredible, especially given its limited size, team of software engineers who put together an entire design system in a relatively short time. We were the first generation of PhDs who had learned the Mead-Conway methodology, so the first generation of computer-scientists rather than electrical engineers, who knew how to design a chip. For several years I think we had clearly the best design tools that you could buy. Of course you had to use VLSI to build your silicon to get your hands on them, which was a good business model when VLSI started out but became less tenable as the DMV (Daisy, Mentor, Valid) got going and promoted the idea of software coming from a 3^rd party EDA industry with libraries as the link to manufacturing. When it was just DMV, largely used for simple gate-arrays, VLSI was still in good shape since more complex designs required more powerful tools. But when ECAD and SDA merged to form Cadence we suddenly had a whole lot more competition. Every semiconductor manufacturer, especially in Japan but even Intel (I bet you’d forgotten they were in ASIC for a while) entered the ASIC business.

Since they didn’t know what they were doing initially, they could only compete on price. In practice, they weren’t very competent for many years. We would often end up bidding on designs where our price (and LSI Logic’s, the other company founded at almost the same time focused on gate-arrays) were twice the Japanese. “Come back when they fail,” we’d say and usually they would.

I think it was Wilf Corrigan, CEO of LSI Logic, who pointed out that the EDA industry stole all the profit from ASIC. They shipped tools that, in the early days at least, really weren’t very good. But the ASIC manufacturers only made money when the design got through so they ended up incurring all the costs of support. If you look at VLSI Technology over the years, it made money some years, lost money other years but it never generated enough cash to grow organically when you took its capital requirements (we had 2 fabs) into account. At one point, as the ultimate vote of no-confidence in the ability to generate profit, VLSI’s book value was less than the cash in the bank.

I joined VLSI about 18 months later. I think my hire date was June 28^th 1982 (and we all got a $100 bonus for July 4^th that year, so not a bad start. $100 was worth something back then). I stayed for 16 years eventually sawing off the branch I was sitting on. By then I was running Compass and we were acquired by Avant! I stayed there for 8 hours after the deal finally closed, resigning on a Friday afternoon and starting at Ambit on Monday morning. Good decision.

The non-Compass part of VLSI was eventually acquired by Philips Semiconductors (now NXP) in a hostile takeover in 1999 for $1B.

By some measures, VLSI was a big success: we invented an industry, pioneered various design tools, were successful in PC chipsets, early into wireless and grew from nothing to a $600M (I think) business. But the stock price never went anywhere in 15 years, spending most of its time lingering in the $11 to $15 range. In fact from my personal financial point of view, the most important event was the 1987 stock market crash when all our options were repriced to $4. So once the stock went back to its usual range there was a nice profit.

But I learned an incredible amount about silicon, software development, management. Compared to most people in EDA I like to say I have silicon in my veins. I’m often disturbed by how little about semiconductors EDA people know. It was a great ride.

The basic transition is that we are going towards very large technology companies that operate on global scale to supply other large organizations with as much as they can, as opposed to the recent decades when we have had specialized companies (Microsoft for operating system, Dell for hardware, Oracle for database  etc). They will be much more vertically integrated. For example, Oracle bought Sun and has said they are looking at semiconductor companies. They want to supply not just databases but the entire computing environment to their customers.

Here’s an interesting statistic: the largest 12 technology companies are sitting on so much cash that they could buy all of the other publicly traded technology companies. Their stock prices reflect this power: they have been rising much faster than the smaller technology companies, which have languished. The giants are truly giant: Apple has a market cap of nearly $300B as I talked about recently and over $40B of that is in cash.

Any company not doing billions in business and operating on a global scale is in play and a target for acquisition. Note that in EDA, although they do operate globally, none of the “big” EDA companies is really big by this standard and so they are all in play. Synopsys has a market cap of about $4B. ARM has a market cap of $8B. There have been some rumors that Apple might buy ARM. I’m not sure that would make much sense, but they would barely notice the dent in their bank balance.

The last century was largely defined by energy and, especially, oil (OK, up until about 1990). Oil exploration, the creation and growth of the automobile industry, the creation and growth of an electricity generation and distribution industry. ExxonMobil is, of course, the current name of (several parts of) Rockfeller’s Standard Oil Company.

The previous century had been defined by agriculture and, to a lesser extent, by railroads. Indeed, the railroads of the 1800s were the Internet boom of the time: a few large profitable companies and hundreds of completely nonviable railroads in places where it turned out there wasn’t enough business to support a company. By the way, did you know that the Lefty O’Doul bridge by AT&T park in San Francisco used to be a rail bridge since the baseball parking lots were railyards. That’s why it is so massive.

For the most of the last 50 years Exxon has been the most valuable company on earth as it continues to be today. I believe GE were more valuable than them for a short period (the Welch years) and Microsoft pushed ahead at one point in the 1990s, but both fell back. However, I think they are on borrowed time and, if Apple continues to execute as well as it has been doing, then they will eventually surpass them.

But in the 21st century consumer electronics looks like it is going to be the defining technology: Internet, computers, cell-phones and who knows what else. Although in first quarter PetroChina was actually more valuable event than Exxon, ChinaMobile is also in the top 10 with its 570 million subscribers. That’s another trend we can expect to see more of, Asian companies rising to the top. When consumer electronics is the technology, Asia has a lot of consumers. Remember, the population of China (never mind India) is bigger than the US, all of Europe, Japan, Brazil combined.

Apple apparently has 50,000 employees. Not the over 80,000 that ExxonMobil has but in the same league, but nothing compared to Walmart’s two million employees.

With revenues of $65B Apple makes over $1M per employee. Revenue per employee isn’t actually a very interesting measure, it often merely indicates how much a company outsources, but when you consider that many of those employees are in retail and so not highly leveraged, the revenue per person in the core company must be huge.

In other parts of the business, in particular semiconductor design, Apple is outsourcing less than it used to. The original iPhone was all parts purchased externally, the heart of the iPad is the A4 chip designed internally at Apple (with lots of IP from elsewhere, of course). This is a trend that I think is going to be important and that I’ll come back to soon.

This model is broken for all sorts of reasons. The big EDA companies just don’t have the stock valuations and the cash to make acquisitions in the $100Ms. As a result, almost no VC will fund a new EDA company or even put much more money into one that they already have on their hands. Plus, the slow adoption of the most advanced technology and falling design starts make it impossible to justify that type of valuation.

On the other hand, it remains really easy to start an EDA company. Find a problem, get together a few engineers who really understand it, and write some code. If you successfully solve a key problem for the leading edge semiconductor companies, they will buy your product.

Some things work in your favor. Part of the reason that the VC model isn’t working well for EDA is that it isn’t working well in a lot of segments: it just doesn’t cost enough to require VC-level investment. Computers are cheap. Cloud computing means that large capital investment is not required, you can have all the peak compute power and storage for almost nothing. If you are lucky, you may find enough friends, fools and family to invest in your company. Probably you won’t be able to pay anyone until you get your first product far enough along that you have a chance to raise some investment. The key is to keep that investment small, keep the burn rate low and run the company so that a $20M acquisition is attractive. Or that you have the old Metasoft (HSPICE) model of having a small highly profitable EDA company that throws off a lot of cash every year in bonuses, even if you don’t get acquired (although they did in the end when Gerry Hsu sent them an offer that they had 24 hours to accept). VCs disparagingly call these “lifestyle” companies, but if you have 15 people in the company and $10M in revenue that could be quite a lifestyle.

So why am I reiterating all this? Because Jim Hogan and I are leading a discussion on just this topic next Tuesday evening. “So you want to start an EDA company…” at the San Jose Doubletree on February 23 at 6:30-7:30 in the Oak Ballroom (bars are open in the area!). This is during DVcon but you don’t need to be registered to come along.

One of the analysts back then was Jay Vleeschhouwer (I bet you leave out one of the "h"s if you type his name without looking) who was at Merrill Lynch until the recent downturn. He was one of the most technical of the analysts that covered EDA and so I spent a fair bit of time with him. He’s resurfaced at Ticonderoga Securities. I had breakfast with him a couple of weeks ago. He’s just finished a big more-than-you-want-to-know report on the EDA industry that is 55 pages long. Ticonderoga have announced that they are initiating EDA coverage (plus coverage of some other software companies). Their (Jay’s) initial stock recommendations are Cadence neutral, Mentor buy and Synopsys neutral. Remember that a good rule of thumb about recommendations is to back them all off to be more negative. So phrase like "strong buy" means "buy", "buy" means "hold", "neutral" means "don’t buy", "hold" means "sell" and "sell" means "you stupid idiot why didn’t you sell this dog ages ago."

Jay estimates that EDA declined by 10% in 2009 to $4.15B after a previous 11% decline in 2008. He’s forecasting growth of 3-4% in 2010 (although this is misprinted as 2011 in the summary but not the body of the report).

I love all the boilerplate risks that SEC rules now kind of make necessary: Risks include better or worse than expected industry conditions; better or worse than expected bookings and product adoption; better or worse than expected share gain; better or worse than expected margin leverage; or better or worse than expected cash flow. In other words, I could be wrong. Jay will also be moderating the EDAC CEO forecast panel later this month, where we can expect Wally to produce lots of quantitative graphs showing how good or bad 2010 will be, Aart to say that Synopsys is in their quiet period so he can’t say much, and Cadence to predict that 2010 will be better than 2009 since it could hardly be otherwise.

But the Kauffman Foundation has done some research on the ages of entrepreneurs which they announced earlier this summer. Take a look at the chart below. First, I apologize for how hard it is to read, Edward Tufte would not be pleased (and if you don’t know who Edward Tufte is then rush and buy “The visual display of quantitative information” immediately, and then perhaps his other books too).

The chart shows how recently, if anything, older entrepreneurs have been increasing. But at the very least is shows that there are plenty of entrepreneurs at all ages.

Of course there are entrepreneurs who are even younger too. My son works for YouTube and the most popular channel there is an annoying teenage kid called Fred who speeds up his voice. He is on track to be the first YouTube millionaire and is currently making over $50,000/month by selling ads and merchandize. There are 1.5M people subscribed to his channel.

Talking of being entrepreneurial, here’s one of my ideas. Most sites on the internet are largely developed by people for people like themselves, at least initially. On this basis I think older retired people must be an underserved demographic. They are also the richest age-group (in most countries there is a vast transfer of money from young to old going on in ways that will not be sustainable for the current younger generation by the time they are old). And they have lots of time, which is a scarce commodity. And many of them, although not all, are online. So I haven’t managed to think of a great idea but I firmly believe that this is a great place to look for an opportunity.

So entrepreneurs come in all ages although the kids that make it big seem to get all the publicity.

If you are a technologist of some sort then it seems like the challenge of getting an EDA company going is insurmountable. After all, there are probably only a couple of dozen people in the world who have deep enough knowledge of the esoteric area of design or semiconductor to be able to create an effective product. That seems like it should count as a high barrier.

But, in fact, technology is the lowest of barriers if you are in a market where technology counts for something. Designing and building chips is something that races along at such a breakneck pace that the whole design ecosystem is disrupted every few years and new technology is required. It has to come from somewhere. As a result, brand-name counts for very little and small companies with differentiated important technology can be successful very quickly.

Other industries are not like that nowhere else does technology move so fast. What was the last big innovation in automotive? Probably hybrid powertrains. Most cars still don’t have them and it is now ten year old technology.

Let’s think of an industry with just about the least amount of technology, so pretty much at the other end of the scale from EDA and semiconductor: bottled water. Do you think that your bottled water startup is going to do well because you have better water technology? Do you think that the customer who chose Perrier rather than Calistoga could actually taste the difference anyway? Bottled water is selling some sort of emotional aspirational dream.

You’ve obviously noticed that if you go to bar and get upscale water then you typically end up with something from Europe (San Pellegrino, Perrier, Evian) and not something from California (Crystal Geyser, Calistoga). It has to be bottled in Europe and shipped here. Why don’t they ship it in bulk and bottle it here? For the same reason as wine is bottled before it is shipped: nobody would trust what was in the bottle. One thing that surprised me when I was in Japan a couple of years ago is that the Crystal Geyser water we turn down as being insufficiently upscale is what they drink over there. It comes from California, the other side of the Pacific, how exotic is that? I don’t know if the third leg of the stool exists, people in Europe drinking water from Asia: bottled from a spring on Mount Fuji, how zen is that?.

In between are lots of companies and industries where there is obviously a technical component, and an emotional component. BMW may be the ultimate driving machine, but most people who buy one couldn’t tell you what a brake-horsepower is, even if they know how many their car has. And almost nobody actually uses all that horsepower, running their car at the redline on the tacho all the time. Yes, there’s technology but mostly it’s an emotional sell.

In the commercial world, think of Oracle. Do you think you are going to displace Oracle because you’re little startup has some superior relational database technology? No, there’s a whole ecosystem around Oracle, they largely sell to people who don’t understand technology (CFOs) and so brand-name counts for something. They are partially making an emotional decision and buying peace of mind.

Brand name still counts for a lot in the consumer market space, even if less than it used to. This is measured by the increase in price for the brand name that consumers will pay compared to the no-name. Many of the top brand names in the world (Coca-Cola, Kellogs, Colgate) are very old going back a century or so but the premium, especially in the current downturn, that people will pay to get a Sony rather than Best Buy own-brand is shrinking.

So brand name or ecosystem are really high barriers to entry. Technology not much. A few smart guys and a two or three years of writing code is a lot easier than recreating the ecosystem around ARM, never mind making your cola as well known as Coke.

Peter Thiel, who invested in both PayPal and Facebook so seems to know what he is doing, reckons it is to examine how much the CEO is paying him or herself.

Thiel says that “the lower the CEO salary, the more likely it is to succeed.”

A low CEO salary has two effects, both of them important. It means that the CEO is focused on making the equity of the company valuable, rather than attempting to make the company last as long a possible to collect a paycheck.

The second effect is that the CEO’s salary is pretty much a ceiling on the salaries of all the other employees and it means that they are similarly aligned.

The effect of those two things together means that the cash burn-rate of the company is lower, perhaps much lower, and as a result either extra engineers can be hired or the runway to develop and get the product to market is longer.

When Thiel was asked what was the average salary for CEOs from funded startups he came up with the number $100-125K. For an EDA startup, this seems pretty low since it is much lower than good individual contributor engineers. I have seen a report that an EDA or semiconductor startup CEO should be paid around $180K (plus some bonus plan too). On the other hand, maybe Peter Thiel is right. How many EDA and semiconductor startups have been that successful recently?

A good rule of thumb in a startup is that the more junior you are then the closer to normal market salary you should get. There are two reasons for this: you can’t afford it and you don’t get enough equity to make up for it. If you are on a $100K/year salary at market, you probably can’t afford to work for $50K/year. If you are an executive at a big EDA company making $400K/year you can afford to work for under $200K/year. If the company makes it, the vice-presidents in the company will have 1-2% equity, which is significant. The more junior people typically not so much (at least partially because they are that much more numerous) unless the company managed to bootstrap without any significant investment.

Thiel has a company, younoodle, that (among other things) attempts to predict a value a startup might achieve 3 years from founding. It is optimized for internet companies that have not yet received funding, so may not work very well for semiconductor or EDA startups. And guess one of the factors that it takes into account when assessing how successful the company will be: CEO pay.

On the other hand, many startups fail because they are too early to market. In EDA, technologies tend to be targeted at certain process nodes which we can see coming down the track. There’s little upside in developing technologies to retrofit old design methodologies that, by definition, already work. Instead, the EDA startup typically takes the Wayne Gretsky approach of going where the puck is going to be. Develop a technology that is going to be needed and wait for Moore’s law to progress so that the world does need it. The trouble with this is that it often underestimates the amount of mileage that can be got out of the old technologies.

Since process nodes come along every couple of years, and even that is slowing, getting the node wrong can be fatal. If you develop a technology that you believe everyone needs at 45nm but it turns out not to be needed until 30nm then you are going to need an extra two years of money. And even then, it may turn out not to be really compelling until that 22nm node, after you’ve gone out of business. All the OPC (optical proximity correction) companies were too early to market, supplying technology that would be needed but wasn’t at that point in time. Even companies that had good exits, like Clearshape, were basically running out of runway since they were a process generation ahead of when their technology became essential.

The windows paradigm was really developed at Xerox PARC (yes, Doug Englebart at SRI had a part to play too). Xerox is often criticised for not commercializing this but in fact they did try. They had a computer, the Xerox Star, with all that good stuff in. But it was way too expensive and failed because it was too early. The next attempt was Apple. Not Macintosh, Lisa (pictured above). It failed. Too early and so too expensive. One can argue the extent to which the first Macs were too early, appealing only to hobbyists at first until the laser printer (also invented at PARC) came along. There are other dynamics in play than just timing but Microsoft clearly made the most money out of commercializing those Xerox ideas, coming along after everyone else.

Another means of being too early is simply having an initial product that it turns out nobody needs yet because it’s not good enough yet. Semiconductor development processes are all about risk-aversion, and any change has to mean that the risk of changing is less than the risk of not changing. For a startup with an early product in a process generation where the technology might be only nice-to-have this is a high barrier to cross. The startup might just serve as a wakeup call to everyone else that a product is required in the space, and eventually another startup executes better (having seen the first company fail) or the big EDA companies copy the technology into their own product line.

Overall, I think more startups fail by being too early to market than fail by being too late. Remember, it’s the second mouse that gets the cheese.

And VC money has dried up. It now costs $50-100M to design a brand-new chip and get it to market and then, if you are  lucky, you have a fabless semiconductor company that might get bought for $50-100M. The numbers just don’t work. It’s a similar story, but with lower numbers, for EDA companies. There hasn’t been a new EDA company funded by VCs for 3 or 4 years (just a few follow-on investments).

That huge $50-100M design cost is both terrible (nobody is funding chips) and an opportunity (it’s worth a lot to reduce it). It reminds me of the two shoe companies that sent their top shoe salesmen to Africa when shoemaking was first automated 100 years ago. The first writes back: “no opportunity here, they don’t wear shoes.” The other writes back: “enormous opportunity, they haven’t started wearing shoes yet.” Clearly one enormous  opportunity in EDA is to reduce that $50-100M cost to $5-10M. To remove the $2M/month for a year cost of verification for a chip. To halve the design cycle.

There’s also the aspect that nobody knows what will happen to cause an upturn in the semiconductor customer base, the health of which is pretty much a prerequisite to a healthy EDA industry. As Lucio said, “Discontinuities are not forecast, they are only taken advantage of.” Nobody forecast the cell-phone market, Cisco, the PC, DVRs, video-games etc. But lots of money was made bringing entire ecosystems into existence to deliver them. Who knows what will be the next cell-phone?

The panel all seemed to think it was a good time to start a company. Clearly just as much innovation happens in a downturn, so in that sense it is true. Working in small innovative companies is always fun, but I think that there has also to be the chance of financial reward to make it attractive versus working for a big more secure company at a higher salary. Shishpal thought you should do it simply for love of innovation and technology, but the rest of the panel (and I suspect most of the audience) thought that this was unrealistic.

Or else, instead of the chance of making a significant capital gain we should all go and work in the public sector and have great retirement benefits anyway, paid for out of everyone else’s capital gains.

The bottom line is that the only way to really make an EDA company work today is to bootstrap it. Denali is proof that it is possible to build a full-scale company this way. More likely is to keep the company so small that even a $15M exit is attractive. But I question whether a company built this way is going to make an enormous dent in the cost of design. It is possible to develop a little piece of incremental technology this way that fits in the normal flow. I’m not sure it is possible for a handful of people to create technology that completely disrupts the way design is currently done.