Investment in the semiconductor industry on the “window”: Does the Silicon Valley model still work?

The semiconductor industry is different from other industries. In addition to capital-driven, technology accumulation and product cycle are insurmountable. “The cost of government and investors will be high when you save money alone. Now that some companies are supported, money is not earned from the market, but by subsidies and investment, which means it’s Pricing is not based on market rules, which is an injury to the industry."

On August 31, ARM China Executive Chairman and CEO Wu Xiong Ang said at the Jimei Semiconductor Summit held in Xiamen that from the perspective of investment, the semiconductor industry is not optimistic about investors, and venture capital is not keen on the industry. Because of the nature of the industry.

The characteristics of large investment and long return period have long erected “invisible barriers” for semiconductor industry investment. However, in recent years, China's semiconductor industry has been surging, and a new round of investment boom has come to the fore. The government funds represented by the National Integrated Circuit Industry Investment Fund ("Big Fund") and local industrial investment funds, the venture capital department within large technology companies, and the three private forces active in the semiconductor industry are pouring into the semiconductor industry.

While capital is pushing the semiconductor industry into an accelerated development track, it has also caused many domestic semiconductor practitioners and investors to worry about “overcapacity”. Excessive capital may lead to problems such as high project prices, easy to be dismantled by companies, and excessive competition in the same category, which in turn deviates from the core development model in which semiconductor companies rely on profits to continuously invest in research and development.

Is the Silicon Valley model suitable for today's China?

Speaking of the semiconductor industry, it is inseparable from venture capital.

Huang Qing, managing director of Walden International, told reporters in the 21st Century Business Herald that the rise of Silicon Valley is dependent on the rise of the semiconductor industry, and the start of semiconductor companies relies heavily on venture capital.

George Dorriot is known as the "father of venture capital", and its American research and development company, founded in 1946, is considered the beginning of a non-family venture capital firm model. However, some scholars believe that "the father of venture capital" should be the co-founder of Davis-Lock Company founded in the 1960s, Arthur Locke, Locke helped Fairchild Semiconductor become the first to be established by venture capital support. Silicon Valley, which later founded its own company, played a key role in the creation of many Silicon Valley high-tech companies such as Teledyne, Intel and Apple.

After signing an "Agreement" with Locke and another banker, Bard Coyle, on 10 dollar bills, Fairchild "eight traitors" on September 18, 1957 to "Father of Transistor" William Shaw Klee submitted his resignation, and this day was also named by the New York Times as one of the ten days to change American history.

The “eight traitors” pioneered the talent team's entrepreneurial model with the support of venture capital, which played a key role in the rise of Silicon Valley.

Chen Guanhua, a senior professor of chemistry at the University of Hong Kong and co-founder of Hong Kong X, a technology entrepreneurship platform, told the 21st Century Business Herald on September 20th that his team invested in a Silicon Valley startup that focused on FPGAs last year. Since Intel and Xilinx, the two companies are leaders in the field of FPGAs.

“They developed a new FPGA solution that was faster and more efficient, but it was very difficult at the time, and the funds were almost exhausted.” Chen Guanhua said that his team of experts realized the value of the project and that the startup had no revenue. In the case of an investment. Now the company has cooperated with Samsung on the development of 7nm chips and has triggered Intel's acquisition interest.

Sravan Kundojjala, deputy director of Strategy Analytics mobile phone technology research services, pointed out to the 21st Century Business Herald that the semiconductor industry is now maturing, and companies in the industry are actively investing in mergers and acquisitions to stabilize the pricing environment and increase the bargaining chip with the customer base; Start-ups within the company often hold niche emerging technologies and play a complementary role for big companies. "Compared to the Internet and software industries, there are not many start-ups emerging in the semiconductor industry."

“Like Intel, Samsung, Qualcomm, Google and MediaTek all have their own internal venture capital departments.” Kundojjala said, “They are identifying and investing in the next generation of technology, and many semiconductor companies have been acquired by these large companies.”

However, Feng Jinfeng, a senior IC industry expert who currently works in Shanghai beyond Moore Fund, believes that SMEs are always the most innovative and dynamic enterprises. This conclusion is generally applicable, and the semiconductor industry is no exception. "So, in today's billion-dollar, multi-billion-dollar semiconductor industry investment fund, the 'risk investment' model is still crucial to the development of China's semiconductor industry," he told reporters in the 21st Century Business Herald. "Of course, this model has some changes in China."

Feng Jinfeng pointed out that on the one hand, the investment promotion of domestic parks is not small, and semiconductor start-ups can enjoy preferential policies such as rent-free and subsidies for settlement; on the other hand, the park also basically has its own investment platform and has the willingness to invest in semiconductors. enterprise. In his view, these are features that are not available in the rise of Silicon Valley and pose a challenge to traditional venture capital investment.

"The domestic outstanding semiconductor venture capital institutions are mostly ones with professionals, proficient in law, and proficient in listed finance." He said that under the current background of China's vigorous development of the integrated circuit industry, venture capital is still not available. Alternative mode.

Is the industrial investment on the “window” over-resourced?

Yin Jiayin, managing partner of Beijing Hailin Investment Co., Ltd., told reporters of the 21st Century Business Herald that compared with the Internet and other industries, the semiconductor industry has large investment and long return period, and foreign giants have built high barriers in this field. There are many uncertainties in whether a latecomer can succeed. “Every investor wants to get the desired return in a relatively short period of time. In this context, most funds prefer short-term projects.”

After the country listed semiconductors as a strategic pillar industry, with the introduction of a series of support policies and the establishment of official industrial funds of the central and local governments, the development of the domestic semiconductor industry accelerated, and the possibility of corporate success also increased significantly. "All visionary capital will not easily let go of such opportunities." Yin Jiayin said.

In 2014, many people in the industry believed that it was the "first year" for the rapid development of China's integrated circuit industry. The integrated circuit was listed as an emerging industry for the first time in the government work report that year; in the same year, the "National Integrated Circuit Industry Development Promotion Outline" was released, and the "big fund" was completed. The fund operates in a corporate form and operates in a risk-based manner.

Around 2016, various local IC industry funds began to set up. For example, the Shanghai IC Industry Fund was established in 2016 with a target size of 50 billion yuan; Guangdong announced the establishment of an integrated circuit industry investment fund in June of that year.

However, many investors in the semiconductor industry told reporters that the investment in the semiconductor industry, which is now on the “window”, has already seen “over-capitalization”.

Su Renhong, founding partner and CEO of Hushan Capital, pointed out to the 21st Century Business Herald that many of the market participants in this wave of enthusiasm are not funds that specialize in investing in the semiconductor industry, which really pushed up the price of the project. There are still many investment opportunities in the semiconductor industry, but some of them are hidden under the bubble, which makes the investment more difficult.

"The most important thing is that once the industry is not healthy, it will not make money, and the company will not be profitable." Su Renhong said, "Semiconductor is not the Internet, the company must be profitable to support its development, and the return on capital will not be available in the short term. In addition, the semiconductor market capacity is also limited. The ideal situation should be that a category or market segment is orderly, with only a few companies focused and deep-rooted. "It shouldn't be a swarm of bees, everyone will do it. In the end, no one will make money, and the industry will be destroyed."

When asked about the challenges that constrained the development of the industry at the Micro-Semiconductor Summit, Li Min, chairman of Ruixin Micro, also bluntly said that he was afraid that the industry would be "overheated" like "collectively fighting chicken blood." Zhang Fan, chairman of Huiding Technology, said on the same occasion that the current heat of Chinese semiconductor investment has led to the high price of almost all projects. “Getting so much financing at the beginning (stage) or the price is too high may not be a good thing for the company's future development.”

However, Feng Jinfeng believes that the current overcapacity of the industry is just an illusion. "In fact, the money is still very tight, especially private capital." He said, "The state has recently imposed strict restrictions on banks and insurance funds investment industry funds. In a certain period of time, fundraising difficulties may be a common phenomenon."

Lin Jianhong, research manager of Jibang Consulting Tuohan Industry Research Institute, told the 21st Century Business Herald that Samsung, Intel and TSMC have spent nearly 10 billion US dollars in capital expenditure in the past three years, if they are based on Chinese memory chips or wafers. After five years of work behind leading companies, the total capital requirement for supporting a leading manufacturer in these two areas can reach 200 billion US dollars. “And, the development of the industry does not stop at only two companies.”

Kundojjala also said that with the advancement of semiconductor manufacturing processes, chip design is becoming more complex and difficult, requiring a huge investment response. For example, Qualcomm spent $27 billion on research and development between 2013 and 2017, and the company's R&D spending from 2008 to 2012 was $15 billion. NVIDIA has increased its R&D expenditure by 2.5 times between 2012 and 2018.

“On average, a semiconductor company's investment in R&D needs to account for 20% of revenue.” Kundojjala said, “Compared with other industries, the semiconductor industry's demand for capital is at a very high level.”

Focus on investment in the industry chain

Concerning the current high price of semiconductor industry projects, Su Renhong said that the semiconductor industry is different from other industries, except for capital-driven, technology accumulation and product cycle is insurmountable. "If everyone is overly impetuous, it may hurt the industry."

Su Renhong believes that to avoid this situation, it is necessary to have a long-term willingness, ability, and indeed suitable for the development of the semiconductor industry local government, and professional semiconductor investment funds. "The cost of the government and investors will be high," he said. "Now some companies are supported, money is not earned from the market, but by subsidies, by investment, to make money. It means that its pricing is not in accordance with the laws of the market, it is an injury to the industry."

In his view, some companies that should have been eliminated by the market have received support from less professional and rational investors and local governments that want to develop the semiconductor industry, and have caused too many similar companies.

"This market-oriented solution must be solved by market-based means." Su Renhong said, "China's development of the semiconductor industry, many high-tech projects require government support, including cutting-edge projects in equipment, materials, and design. These are the non-market elements that the government should primarily support."

“The market elements don’t need government support, but they need to combine marketization experience in support.” He added, “We should not invest in companies that do not generate any economic benefits and damage the entire industry. ”

Chen Guanhua also pointed out that although the Chinese venture capital industry has been "hot" in recent years, the overwhelming majority is concerned with the business model. "The business model returns quickly. Once the model has set the funds to go in, it will take a few years to make a unicorn, but it is actually a pile of money." He said, "In the real high-tech industry, this is unrealistic. ”

In his view, Walden International is a good example of investing in the high-tech industry today. “Walden has invested in many semiconductor companies, and more than 50% of them have gone public. Of course, the payback period will be very long, sometimes it may take 10 years.”

Su Renhong worked at Walden International and later resigned to establish Hushan Capital. “The investment in this industry has been the case in the past 10 years. The success is focused on the fund of this industry chain.” He said that the semiconductor industry chain is very complex, involving many industrial sectors, talents, upstream and downstream supply also exist. A lot of changes, unless you focus on the industry chain and have a good understanding, it is difficult to make a good investment.

“Investors need to be deeply involved in this field and have a deep understanding of the industry. Regardless of the external environment, we will follow the development rules of the industry and invest in the semiconductor industry according to our own strategy.” Su Renhong said.

The three-way capital advantage complements each other to form a synergy

Feng Jinfeng believes that under the background of China's vigorous development of the integrated circuit industry, government-led funds, investment funds of technology companies and private capital have also been trying to cooperate. For example, a typical overseas semiconductor merger and acquisition case is usually the object of private capital discovery and docking mergers and acquisitions, and then the government fund funds tray, after the acquisition, choose fashion to large technology companies.

"No one can replace other parties, and their respective advantages and shortcomings are obvious." Feng Jinfeng said, "Private capital is the most dynamic, government funds have the most financial resources, and the investment department of technology companies is the most emboldened."

In Feng Jinfeng's view, the large-scale technology companies' foreign investment often focuses on upstream and downstream integration, creating opportunities for themselves to enter the upstream; others are strategic expansion of the main business.

Lin Jianhong also said that although the investment funds of technology companies are mostly based on investment start-ups, unlike venture capital, its primary goal is often set in upstream and downstream companies related to the parent company's business. Therefore, some countries will limit the shareholding ratio of technology companies in the companies they invest in. “In addition, when the invested company grows to a certain size, venture capital tends to sell shares, but technology companies may buy it, such as Xilinx’s acquisition of Shenjian Technology.”

The government's industrial investment fund focuses on the industrial upgrading of the region, including the scale of the industry, the follow-up of upstream and downstream enterprises, and taxation. “The government’s industrial investment funds value the long-term economic development space of the country, region or city.” Feng Jinfeng said, “This is also the main difference between government-led industrial investment funds and market-oriented investment funds.”

Lin Jianhong believes that it is precisely because of the concern about the development of upstream and downstream industries that the government's capital investment targets are mostly existing leaders in a certain field in China, and the investment period is often longer than the venture capital.

Private capital is purely based on investment income. Feng Jinfeng believes that private capital may lack the “atmosphere” of government industrial investment funds that is more socially beneficial, and there is no upstream and downstream resource endowment that the investment department of large technology companies has, but it has a core capability that is generally lacking, namely professional literacy. .

"In particular, the market-oriented private IC fund, its core team's decades of rich industry experience, has great value for semiconductor startups to take less detours and catch up quickly." Feng Jinfeng said.

Lin Jianhong also said that the three types of investment companies themselves have different positioning and setting, and they have a mutual relationship.

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