A chip company failed in the B round

This is a chip startup with 200 million yuan in Series B financing. "After owing wages for May and June, the company has closed down. Every employee who was dismissed received a termination agreement with no specific amount and no known time of payment." The official website shows that this is a fabless IC design company with branches and offices in California, Shenzhen, Beijing, Nanjing and Hong Kong. Its products include NB-IoT and Cat-M SoCs, which are IoT system-level chips.

According to employees’ descriptions, the investment community has called the official phone number of the company’s headquarters many times, but each time it was in the “temporarily unavailable” state.

This is not an isolated case. When semiconductor investment cools down on a large scale , non-leading startups begin to face financing difficulties, layoffs and even bankruptcy. As the saying goes, "no bubble, no prosperity", the past boom has allowed a number of star companies to emerge in China's semiconductor industry, but as the bubble dissipates, a large number of accompanying projects have begun to reach the edge of the cliff. The semiconductor elimination round is here.

The company that was reported to have collapsed by its employees is an IC chip company, Nolink Technology. From the official website, we can see that this is a rather luxurious entrepreneurial team.

Kong Xiaohua, one of the founders of Nolink Technology, holds a Ph.D. from McGill University in Canada and a bachelor's degree from Tsinghua University. He has worked at Cisco and Qualcomm and has more than 15 years of experience in mixed-mode circuit design and team leadership. During his time at Qualcomm, he happened to catch up with the rapid development of mobile phone chips, and the project team he led grew from 0 to a global scale of 100 people.

Around 2018, a wave of semiconductor entrepreneurship began in China. Kong Xiaohua, who had been a senior engineering director at Qualcomm, chose to resign and start his own business. In September of the same year, Kong Xiaohua found his friend Wang Chengzhou and founded Nolink Technology, a fabless IC design company whose main products are NB-IoT and Cat-M SoCs. Wang Chengzhou is the co-founder and current CEO. He received a bachelor's degree from Peking University and a doctorate from the University of California, San Diego. He served as a technical backbone of Quantenna's startup and also has a good resume and rich industry experience.

In addition, the core team of Noling Technology is mostly composed of industry leaders, more than 70% of whom have a master's degree or above, and the technical team members are professionals with more than 10 years of IC mass production design and related experience. In the early days of Noling Technology, Nanjing sent a special staff member to take the lead in contacting and helping with multiple processes such as business registration, license application, and bank account opening, and also gave Noling Technology preferential policies such as rent and R&D subsidies.

This team of returnees has indeed achieved good results. At the end of 2018, the Nolink Technology team delivered the first tape-out of the NK6010 NB-IOT system-on-chip (SoC), and successfully achieved networking testing in May 2019. Generally speaking, it takes 24-36 months to make a communication chip, but Nolink Technology took less than 15 months to design one of the world's most advanced NB-loT chips, breaking the domestic communication chip development record.

In the following years, Noling Technology was favored by VC/PE and completed three rounds of financing. The latest round of financing was in 2020, when Noling Technology received a 200 million yuan round B investment from investors including well-known domestic VC/PE institutions and local industrial capital.

At that time, the flagship product of Nolink Technology, the "NB+GNSS" chip, had achieved a high degree of integration of communication system functions and applications, and had certain advantages in power consumption and cost, and had already been mass-produced. In terms of application, this series of chips focused on the "logistics and supply chain management" industry segment, and set the market share target at more than 30-40%.

In 2021, Nolink Technology's external news became less and less, and only the company's official website disclosed that the company would bring the NK6010 TCXO-free version of the chip to the 2021 MWC. In addition, after completing the B round of financing, Nolink Technology has no subsequent financing activities, and the official WeChat message also stopped on January 29 this year. Li Yiyang, who participated in Nolink Technology's financing work, told the investment community: "I haven't heard from them for a long time."

It was not until July this year that relevant employees broke the news on social media about the latest developments of Noling Technology - the salary for May and June was in arrears. Every employee who was dismissed received a termination agreement with no specific amount of money and no specific time of payment.

In order to verify the true situation, the investment community has called the official phone number of Nolink Technology headquarters many times, but the number is always "temporarily unavailable". Many investors have reported that they have been in contact with the internal department for details, but no latest response has been received as of press time.

"This is definitely not the only one. More chip companies will close down in the second half of this year due to poor financing." An investor in Shanghai who has been paying close attention to semiconductors for a long time admitted that with the contraction of the primary market, the domestic semiconductor industry is entering a period of reshuffle. On the one hand, leading companies are emerging, and on the other hand, projects below the mid-level are gradually disappearing.

Data shows that from January to June 2022, a total of 184 companies in the semiconductor industry received financing, including 125 early-stage projects (angel round, A round, B round), accounting for about 68%, 24 C round, and 6 D round. This means that the number of semiconductor-related companies that can reach the C round is decreasing . When VC/PE pockets are running low, the once hot semiconductor track has also begun to cool down.

"The first to suffer will be a group of startups focusing on consumer electronics chips," said a semiconductor investor friend in Beijing. He admitted that the team had long stopped looking at consumer chips. Since last year, when they systematically laid out the MCU track, they had looked at many MCU chip projects that focused on consumer scenarios. Although the valuations were relatively reasonable, they found that the technical barriers of such companies were not high, and they mainly relied on marketing and business capabilities to occupy the market. "In the end, we would rather give up the MCU track temporarily than invest in companies that make consumer-grade MCUs."

Since the beginning of this year, more than one investor has said that they will no longer invest in consumer electronics chip companies. "No matter what kind of consumer chip, it is easy to fall into the state of using price to exchange market, and finally enter a dilemma. Overall, the value of such chip companies is not great."

Facts have proved that the consumer electronics chip market is entering a downward cycle. In recent months, driver chips used in TVs, computers and other monitors have fired the first shot of order cuts, and the market has successively heard that wafer foundries have been cut by consumer electronics customers. Subsequently, TSMC, the industry benchmark, also reported that Apple, AMD, and Nvidia had cut orders. Under the wave of order cuts, upstream chip suppliers cut prices for promotions, and the prices of many popular chips such as driver ICs, mainstream memory chips DRAM and NAND Flash have dropped. Even the prices of MCU chips, which were previously the main scarce category, have been "cut in half".

The performance of chip companies in the secondary market has poured cold water on VC/PE . Data shows that since November 2021, the domestic A-share semiconductor sector has continued to decline; at the same time, the situation of chip new stocks breaking the issue price is not optimistic. According to incomplete statistics from the investment community, 7 of the 14 semiconductor new stocks listed from January to April this year broke the issue price on the first day, and 100% of unprofitable companies will break the issue price.

Take Aojie Technology, the "first baseband chip stock", as an example. The company was founded by Dai Baojia, who has been deeply involved in the communications chip industry for many years. It is one of the very few companies in China that has mastered the design and supply capabilities of all-standard cellular baseband chips. However, Aojie Technology is still in a loss-making state. From 2017 to the first nine months of 2021, the company's operating income was 84 million yuan, 115 million yuan, 398 million yuan, 1.081 billion yuan, and 1.433 billion yuan, respectively, growing rapidly year by year. However, the corresponding net profit attributable to shareholders of listed companies was -998 million yuan, -537 million yuan, -584 million yuan, -2.327 billion yuan, and -484 million yuan, with continued losses.

Such performance is difficult to support a good stock price. On January 14, Aojie Technology landed on the Science and Technology Innovation Board with an initial offering price of 164.54 yuan per share, and it fell below the issue price on the first day of listing. As of July 25, it closed at 67.28 yuan per share, a drop of more than 60% from the issue price.

After that, the closing price of the leading RF chip company Weige Chuangxin fell by more than 36% on the same day, becoming the listed company with the largest first-day drop in new shares this year, and also the company with the largest first-day drop since the opening of the Science and Technology Innovation Board; even after the adjustment of the secondary market pricing rules, Zhongke Lanxun still did not escape the first-day break, closing down 29.85%. As of now, Zhongke Lanxun's share price is 59.89 yuan per share, which is far lower than the price of Zhongke Lanxun's latest round of financing before its listing, and the valuation of the primary and secondary markets is seriously inverted .

The cheering scenes at the IPO ringing bell are no longer there. "In the past, we were worried that chip companies would have no place to go public. Now the secondary market has fallen sharply, and the stocks of many companies are not as valuable as before." A partner of an investment institution in South China admitted. Looking at the new chip stocks that have broken their issue prices one after another, primary market investors can't help but feel melancholy.

Half ocean, half fire, this is a vivid portrayal of the semiconductor industry - when consumer chips and mid- and low-end chips are facing financing difficulties, the fields of automotive-grade chips, semiconductor equipment, etc. are still booming.

Not long ago, CoreEngine Technology, a provider of 7nm automotive-grade high-end processors, successfully completed a nearly 1 billion yuan Series A financing round, led by Sequoia Capital, followed by Neusoft, Bosch's Boyuan Capital, SMIC Capital, Jiayu Capital, Guosheng Capital, Hongzhuo Capital, Yingbai Capital, Yuexiu Industrial Fund, and ICBC International. This is the second round of financing completed by CoreEngine Technology this year. In March, CoreEngine Technology received a strategic investment of several hundred million yuan from China First Automobile Group Co., Ltd.

At present, the shortage of automotive chips has not been alleviated, and automotive-grade chips are still being fought over by various investors, and the investment enthusiasm of auto companies is even higher. "As soon as our chip was lit up, the strategic investment department of an auto company contacted us for cooperation and investment matters." The founder of a Shenzhen automotive-grade MCU chip company told the investment community.

At the same time, the top projects in the semiconductor equipment field are also in great demand. Many VC investors have reported that many semiconductor equipment projects are too hard to get recently, and some top projects even require reverse due diligence of investment institutions. "Our partners have to go on stage to present PPT to the founding team to show the depth of our layout in the semiconductor field." Zhao Ming, a chip investor from Shanghai, said that some investment institutions that have shifted from consumer to chip track have no chance of getting bidding qualifications, and the competition is very cruel.

But Zhao Ming further reminded that since July, this phenomenon has become less and less common, and now only occurs in some leading projects with extremely scarce technologies . When VC/PE slows down, the high investment enthusiasm in the semiconductor field gradually cools down and begins to gradually return to rationality. The most direct manifestation is that some chip startups with a money-burning model and no positive cash flow are beginning to face huge challenges——

Recently, a star GPU unicorn in South China has reported that its financing progress is not smooth, despite its previous soaring valuation and the large number of star investment institutions; there is also a unicorn chip company that is still burning money. Although it has just completed financing, it was revealed by FA that it has been in arrears of intermediary service fees; and some founders of semiconductor companies have put down their posture and are willing to accept a flat valuation round.

Obviously, the difficulty of VC/PE fundraising has begun to spread to the entrepreneurial end. Chen Wenhui, vice chairman of the National Social Security Fund Council, previously publicly stated that even in popular sectors such as semiconductors and new energy, the valuations of excellent companies have dropped by about 30% compared to previous expectations. If mid-level projects want to raise money, the highest valuation this year is only half of that of similar projects last year, and "mid-level projects basically cannot raise funds."

From the perspective of investors, the semiconductor industry is still a trillion-dollar track worthy of long-term attention, but the attitude towards chips is more cautious than last year. In the past few years, chips have been "overheated", and some popular tracks have exposed some unreasonable problems. As Shi Anping, chief partner and CEO of Guozhong Capital, said, "Some companies are only in the A round but have called for the C round valuation, and now the B round financing is also blocked. Such companies have overdrawn their lives in advance, and no one dares to take over later. This is undoubtedly a fatal blow to a startup company in the climbing stage."

Qian Peng, a Beijing investor who has been paying close attention to chips for a long time, has personally experienced this wave of semiconductor craze. He lamented that the chip industry is an industry that does not tolerate any speculation, and entrepreneurs should not think of taking shortcuts. Of course, while strengthening the basic skills, entrepreneurs should also adjust their mentality. "Once the company's operating conditions are not as good as expected, it can consider accepting mergers and acquisitions instead of waiting for bankruptcy."

A local venture capital firm boss reminded that from the perspective of capital operation, future opportunities should come from mergers and acquisitions, rather than supporting batches of small seedlings for independent IPOs. This is also the advice many investors give to chip company founders: "Be able to take it, let it go, and accept mergers and acquisitions appropriately ."

Reject fantasy and face reality. In his words, the worst time for semiconductor entrepreneurship has not yet come.

*Li Yiyang, Zhao Ming and Qian Peng mentioned in the article are all pseudonyms of the interviewees.

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