What Investors Look For In High-Tech And Semiconductor Startups

A report by Semico points out that semiconductor chip startups raised US$ 1.3 billion in funding during the last five years. However, there is a stark contrast between the amount raised by North America based startups and those situated in Asia (barring China). So what is it that Indian startups must do in order to raise funds from tech investors? What are these investors looking for? A panel discussion during the India Technology Week this June answered these questions. Here’s a short review.

By Mukul Yudhveer Singh

During the June 2020 edition of India Technology Week (a monthly online event organised by the EFY Group), an eminent panel of leaders from the tech industry discussed the following big question: What do VCs look for in high-tech and semiconductor startups? The sobering report that prompted this discussion was that of the US$ 1.3 billion that semiconductor startups raised over the past five years, 55 per cent of VC funding went to North American entrepreneurs, with Asia (minus China) receiving just a paltry 6 per cent. The China region was not included in the study.

The panel was moderated by Poornima Shenoy, co-founder, THE GAIN. The panellists included Hemant Mallapur, co-founder and executive VP, engineering, Saankhya Labs; C. Muthukrishnan, CEO, Semiconductor Fabless Accelerator Lab (SFAL); Sanjeev Keskar, MD, Arrow Electronics India; Dr P.K. Sundararajan, founder and CEO, BluArmor; and Tarun Verma, managing partner, Silicon Catalyst.

The important questions
A wide audience attended the online panel discussion, and asked pertinent questions that were subsequently addressed by the panellists. Some of the key questions included:

• What do VCs look for in high-tech and semiconductor startups?
• What does a perfect pitch include?
• What is the risk appetite for investors?
• What can one do to secure the funding?
• What are the emerging technologies that will interest the market as well as investors?

Sanjeev Keskar, MD, Arrow Electronics India noted that, “The design cycles in the semiconductor as well as the high-tech industry are very long. Typically, this is around 18 to 24 months. If you’re starting to design a chip today, it might see the light of day only after two years or more. So an investor will surely look at the design cycle time as the key differentiator, since that is the top factor which determines whether you are eligible for funding or not.”

The answers given during the panel discussion to some of these questions are listed below, and will guide aspiring startups on how to successfully solicit investor funds.

What you should keep in mind before entering the semiconductor space

• Many big names are supporting the ‘Make in India’ initiative. However, these big names prefer startups that focus on design-led manufacturing rather than just manufacturing.
• From a global perspective, start building for India first, followed by building for the global markets.
• Angel funding in India has to be largely from the local ecosystem. The cost of sourcing wafers in India is high.
• Semiconductors is a capital-intensive industry. Access to at least US$ 1 million is a necessity to even step into the semiconductor space.
• Always remember that investors can sniff out good from bad products and solutions. They have big teams to do that.
• Your core IP must be strong.
• Getting into the semiconductor space is a long-term commitment.
• There are two types of investors —venture capitalists and strategic investors.
• Identify teacher customers who will guide you on the solutions you are creating in the early stages, and pay you for the product or service you’re developing.

Tarun Verma, managing partner, Silicon Catalyst, pointed out, “Getting to know what the customers want should be a startup’s top priority. Many tend to be tech-savvy and neglect the real pain points. The investor appetite has always been there. Startups need to remember that technology investors have been doing this for years and they have the ability to sniff out the extraordinary from the merely good products.”

What inspires an investor’s confidence

• Unless you have something that differentiates your product or service from others in terms of applications, funding companies won’t show any interest.
• What you will do with the funds received, how you will return them, and what your long-term plans are should be made clear at all stages.
• Team formation is of critical importance. A lot of Indian entrepreneurs operate alone. Remember that single founder companies are not really liked by investors. Have at least three co-founders on board. More co-founders help investors assess risk in a better manner.
• Focus on the design cycle time. The design cycle times are very long (at least 18 months), so anticipating what the market needs two to three years earlier is not that easy. Errors in market calculations can derail your goals!
• You might create a wonderful product. But what if it turns out to be a white elephant? Investors won’t be interested in it at all! The right architecture for becoming techno-commercially successful is a must.
• As technologies advance, it becomes easier for big names to launch a counter solution within months after a startup launches. Unless the differentiator is big, investors won’t feel secure in funding your startup.
• Getting to know what customers want is the first necessity. Investors love startups that know their target audience.
• Prove that you can do the market analysis right. If you do, investors might come to you instead of you going to them.
• Investors don’t like ‘Me too’ ideas at all! Presenting such ideas decreases your funding chances drastically.
• Knowing about the product’s life cycle is most important. A TAM (total available market) analysis is very important for semiconductors.

Dr P.K. Sundararajan, founder and CEO, BluArmor, advised, “For a minute, think of yourself as the investor and your startup as somebody else’s venture; would you now invest? Tailoring the pitch can make a lot of difference to your chances of securing the funding round. What you are going to do with the funding, what differentiates you from others, and what are your plans to scale up should always be a part of the pitch.”

What does a perfect pitch include?

• The problem you are solving.
• What differentiates your startup from others.
• Plan for taking the solution from Power Point to the prototype stage.
• Target audience information.
• The world before your product.
• The world after your product.
• What makes you confident that customers will pay for it?
• What is your path and map for scaling up?
• What is the path to profitability?
• Specs vs price plan and mapping.
• How are you going to invest the money?

Hemant Mallapur, co-founder and executive VP of engineering, Saankhya Labs, said, “Success in the high-tech business is a mix of three things—the value of your idea, your ability to build it and your ability to sell it. If not ‘ten on ten’, each of these must still be able to score a decent value in the startup report card.”

Where do the big opportunities lie?

• AI, ML and deep learning: Not many low-level infrastructure IPs have been created in these domains and hence there is a lot of scope for startups.
• 5G is just starting, and the boom for the semiconductors required for the 5G industry will be big. This is one big area that startups can focus on.
• Telehealth and contactless products are here to stay. So is the energy-saving segment as the world is becoming more environmentally cautious.
• Another segment is ADAS (advanced driver assistance systems) as the trend is just picking up. Tesla has already changed the automotive game in the USA. The rest of the world awaits the change, and the startups that will make it happen.
• Automation is going to be adopted at a very fast rate. Designing solutions in this vertical should also be a focus of startups.
• IoT: As everything becomes connected, the world will require a lot of connectivity modules. Even the smart meters need to be connected via IoT. Industrial, home, or government—almost every device will be connected with IoT modules. Designing these can be a focus of startups.

C. Muthukrishnan, CEO, Semiconductor Fabless Accelerator Lab (SFAL), said, “Don’t just look at VCs for funding. Reaching out to corporate houses can prove to be a game-changing strategy. On close analysis you may find that a lot of big names can benefit from your solutions; so align them with their business goals.”