Silicon startups get the squeeze

Top VCs site rising costs, falling returns

Rick Merritt, EE Times
(06/22/2009 2:52 PM EDT)

SAN JOSE, Calif. — Venture capitalist Andy Rappaport still recalls the telephone conference call when it became clear semiconductor startup Tzero Technologies was not going to make it.
The company had designed an ultrawideband chip that delivered the promised bandwidth and distance. At least three consumer electronics companies planned to design the chip in to future products. But that wasn't enough to keep the startup going.

"The problem came when we looked at the volume those customers would be shipping in 2010 and 2011--partly based on the economic downturn--the resulting revenue and margin for Tzero and the cost of running the company to make those products successful," said Rappaport, a founding investor in the company. "We said, 'hold on these equations don't solve.'"

With no road to profitability on the horizon, backers tried to sell the company to established chip makers or roll it up into other struggling ultrawideband startups. Ultimately the products and most of the team were sold in mid June to one of its smaller customers, NDS Surgical Imaging, for a fraction of the estimated $60 million investors had put into Tzero.

"For me it was a kind of heartbreaker because the technology was fantastic and the team performed spectacularly," said Rappaport.

The Tzero story likely will be repeated more than a hundred times over the next few years as investors slash through a decade of over-investments in semiconductor startups.

Top venture capitalists say the costs of bringing a new processor or system-on-chip to market are becoming prohibitive. It's not the end of the line for semiconductor startups, but opportunities are changing and narrowing. And raising new funds to invest in high tech companies of any kind is getting increasingly difficult.

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