Paul Slaby is CEO of Kaben Wireless Silicon. He spoke at the annual D&R conference in Grenoble last December about whether or not the semiconductor industry will (should?) restructure itself along the lines of the pharmaceutical industry, with large distribution companies being fed by lots of smaller drug discovery companies. The big companies can’t take on the risky business He calls this the semi-fabless model. You can see a video of his talk here (it is about 20 minutes long).
Semi-fabless semiconductor
Starting with the early days, the semiconductor industry has evolved from “everything under one roof” to a variety of narrower or more segmented business models. That evolution took us from the IDM (Integrated Device Manufacturer) model to pure-play foundry, fabless, and IP provider (chipless) business models. From the entrepreneurial angle most of these models have significant problems and do not really address the realities of an early-stage semiconductor company today. Even those most recently developed approaches, such as the fabless and chipless models, have serious flaws.
The problem with the fabless model today, for any aspiring startup, is that with the unending growth in the complexity of semiconductor technology, its capital requirements have ballooned to stratospheric levels where a life cycle funding required typically exceeds $50M+ and more realistically upwards of $100M+, which is more than the appetite of most VCs. Not only that, but the complexity of technology, mix of highly specialized engineering and marketing skills required, depth and breadth of management needed, and just a common-sense chance that something likely will go wrong in such a complex business, makes the fabless model more and more risky and therefore less and less investment-worthy. Does it really make sense to embark on building such a complex machinery, where so many things could go wrong, and which costs so much, just because one has come up essentially with a single “better chip” idea?
The chipless, or IP provider’s model, on the other hand, has an advantage of a far lower capital requirement and much simpler operational infrastructure. Lower complexity makes it also less risky. As a result, it is being pursued by a large number of small, boutique-style, chipless semiconductor companies. It is possible to make a living being a IP provider but it is hard to make a killing. The biggest segments, such as microprocessors, are already mature. Remaining segments do not scale very well.
Despite the shortcomings of the existing semiconductor business models the industry is still dynamic and vibrant, thriving on innovation and creativity. How do we then proceed with capitalizing on this creativity while pursuing a viable business model that has a chance of success and a decent ROI for those involved?
I think that the time has come to further refine the way semiconductor industry is doing business and consider the break-up of the fabless model. In today’s economy, in many cases, the industry would benefit from splitting the fabless model into two parts: the development organization and the delivery organization. I call this the “semi-fabless model”. The semi-fabless company is essentially a combination of an IP provider, a design house, and an outsourced R&D operation. Its core competence and strength lies in specialized R&D and product development capabilities whereas it outsources product delivery operations to the “old” fabless company with the entire infrastructure and the pipeline to market already in place.
The semi-fabless (development) organization is paid largely by royalties from the fabless (delivery) organization. Trading off licensing fees, NRE and royalty payments gives some flexibility to the model. Typically the fabless company would private label the chips and market them under their own name.
On the financial side, the semi-fabless company avoids the need to raise huge amounts of capital and the risks of building a manufacturing operational infrastructure. And the fabless company avoids the development risks and costs while benefiting from expanding its product portfolio and having a pipeline of new products. Most importantly, the semi-fabless model is a scalable model due to the built-in royalties thus making it more investment worthy with manageable risk. A big hit offers a big return but is much more capital-efficient.
Hat tip to Mark Gogolewski for pointing out this video to me.