technology envelope, it will need innovations, and almost all breakthrough innovations come from start-ups.

VC CONCERNS ABOUT THE SEMICONDUCTOR INDUSTRY
In my recent discussions with VCs on start-up investments in the semiconductor equipment field, three major thematic concerns emerged. I’ll first describe these concerns and then in the next section address them in the context of the new start-up strategy for success in the 2000s.

 

equipment in recent years, and acquisition  seems to be the only viable exit. However, this is true for almost all other technology sectors since mid-2000, and the chip equipment industry is no worse than others. I think there will be little or no opportunity for chip-equipment IPOs in the next few years, and we’d better get used to that. Opportunities for building great companies and getting returns still exist regardless of the current IPO market. 
        These VC concerns are genuine, and each has some truth: The dominance of the market leaders in maturing industry, the amount of money

 
 


“There’s no chance to succeed.”

This concern could be summarized in a statement like “Applied Materials (or KLA-Tencor, or Teradyne) will eat your lunch.” Make no mistake, the incumbent market leaders will fight to defend their territories, and they have many advantages, such as financial resources and brand names. No start-up should underestimate the competition.

 

 

needed to invest  and the exit options being more limited are all causes for caution, not abandonment. I believe there are ways to mitigate these problems and overcome most of these concerns.

NEW STRATEGIES FOR START-UPS IN THE 2000s

There are winning strategies that allay the VCs’ concerns for semiconductor equipment  start-ups. The strategies center on five key points.

 
 

However, there are ways to succeed in competing with an entrenched incumbent. The history of high-tech attests to that, whether it’s in computers, disk drives, chips or chip equipment.

“It takes too much money.”

The concern here is that it takes quite a few millions of investment dollars to develop the product, millions more to set up the manufacturing operation, and then millions more still to setup the worldwide sales and customer support organization.
When a VC sees all those millions, they do the math and say that it would take too much money for the return, and it’s not worth it. I will discuss in the next section strategies that could minimize the total investment, because who says you have to do everything yourself?

“There’s a limited exit strategy.”

In VC vernacular, “exit strategy” really means, “How am I going to get my money back?” There has been no IPO in semiconductor 

 


1 – You must have breakthrough technology

For years, if you had significant product improvement (say, 50 percent or more) over what was available on the market, you would have a chance to win. Depending on the specific product, that may no longer hold true. These days, you need something quite different as well as much better to compete successfully against the entrenched market leader.
        Your technology must be so “disruptive” that it enables you to leapfrog the incumbent and to take the market leadership away – for the market segment in which you compete – or at least to become a strong Number 2 player in the meantime.
        Using breakthrough technology to compete against the incumbent is not a new concept. Many high-tech companies in the chip industry and elsewhere have successfully employed this strategy. However, as the industry matures, the need to own, protect and leverage a breakthrough technology becomes a prerequisite for start-ups.
        Having such a competitive advantage is no guarantee for success, but without it, it’s almost a