As the knockout rounds begin, five ways for domestic chip companies to die
Begin with the end in mind, and you will achieve the end. The final result must be taken into consideration from the beginning. The Chinese market ultimately does not need so many chip companies, and the winner takes all.
The founders and investors of domestic chip companies may have known this from the beginning.
It’s the right time to write this article. The mighty wave of chip entrepreneurship in China is about to ebb. However, Chinese entrepreneurs are all "little strong" who cannot be defeated. This kind of stubbornness and resilience deserves admiration and respect. However, a correct understanding and knowledge of the industry are the most basic qualities and requirements for an entrepreneur and investor. Otherwise, enthusiasm will eventually be in vain, hurting the country, the people, and yourself. Every chip entrepreneur must always remember that every government subsidy is taxpayers’ money.
Are you making valuable chips? Are you building a valuable chip company? If so, please strive to be in the top three on that track, otherwise you will be eliminated. How to be among the top three on the track? First of all, you must avoid dying while working hard and moving forward. Only by surviving can you have a chance.
Only when you know how to die can you know how to live. Today, let’s talk about several “methods of death” faced by domestic chip companies.
die in team
According to a survey by an authoritative foreign entrepreneurship research institution, 62% of startup companies died from internal conflicts between the founder teams. The number of founders in the team also has a certain relationship with the success of the startup.
Some time ago, Noling Technology collapsed, causing waves in the chip industry. According to reports, in November 2017, Wang Chengzhou took the lead in registering and establishing Noling Technology in China. Kong Xiaohua joined in the first week of 2018 and quickly formed a core team of 12 people to focus on chip design in the field of cellular IoT wireless communications. However, in 2020, when 200 million yuan in financing was completed, Kong Xiaohua, a core figure, suddenly left Nolin Technology and returned to the United States for development. The departure of the core technology founder of the startup company was a key factor in the collapse of Noling Technology.
Through the case of Noling Technology, we can extend several common issues:
1
pseudo demand
According to online information, the first and only product launched by Noling Technology is the NB-IoT chip NK6010 with integrated GNSS. The product has no problems with performance and technology. However, Noling Technology had almost no revenue in 2020, and its revenue in 2021 will only be about RMB 1.5 million. It can be seen from here that there is a problem with product planning and definition, and it is a product with false requirements. In fact, this is a very ambitious team. They want to create valuable technologies and products, and they want to be differentiated, but they lack someone who truly understands the market and products. A company's mistakes are buried from the beginning of product planning. If they are like other NB-IoT chip companies on the market and make homogeneous products, they will be in trouble at best, with sales but no profits.
2
paper team
Failed startups lack people who can direct the overall situation and partners with complementary capabilities and shared interests. Entrepreneurial partners have to go through good times and bad times together, the distribution and conflicts of interests, and disagreements and disagreements. After going through all this, whether this team can still sit together, work together, work hard and persevere towards a common goal is the key to distinguishing whether this team is a paper team or a hard team. Judging from the results, Noling Technology is a paper team.
3
Spend money randomly
It is recommended that chip company entrepreneurs save money now, because the cold winter of capital is coming, and they should save money on places that should not be spent. In the past two years, it was easy to raise funds for chip startups and there was plenty of money. They spent money lavishly and poached peers at high prices, which led to a rapid increase in industry costs. Therefore, making chips is becoming more and more expensive. In terms of research and development expenses, Nolin Technology spent nearly 80 million yuan in 2020, and this will double to 160 million yuan in 2021.
die from expansion
For chip companies, is the expansion of product lines or tracks an opportunity or a trap? There is no one-size-fits-all answer, it depends on each company’s circumstances and timing. For most startups, expansion is very dangerous, and they often die from expansion.
Chip startups basically start with a project. The choice of the project must be based on the judgment of opportunities and the advantages of its own resources, and concentrate all efforts to achieve its goals. While, for startups, scaling is the vision of every business, rushing to scale is like a dose of startup poison. The prerequisite for expanding scale is "burning money". Most start-up companies are unable to expand by relying on their own profits and can only rely on continuous financing. If there is a lack of later-stage financial support, the company will die.
Why do chip startups choose to expand? There are three main reasons:
1
Cater to investors
Some investors like to chase hot spots and like big tracks and market sizes. The more product lines a startup company plans, the greater the total market size, and the greater the interest of investors, which means the higher the return on investment. In order to gain the favor of capital, some start-up companies blindly expand, lose their positioning, and pursue unattainable goals regardless of cost. However, many investors do not understand the chip industry. They start from the goal, theoretical derivation, and analysis conforms to the investment logic, so they invest in start-up companies. The success of one case will cause many start-up companies to follow suit.
2
Product homogeneity, looking for new tracks
There are too many chip startups and the track is overcrowded, resulting in a serious problem of product homogeneity. Either outlast your opponent or find a new track. This is a dilemma. Not looking for new tracks to expand is waiting for death, but looking for new tracks to expand may be courting death.
Today, it is extremely difficult to find a new chip track with opportunities. Everywhere you look, there are startup companies gathering together or giants already entering the monopoly market. Therefore, it is particularly important to choose a direction with technological evolution and iteration. Through technological breakthroughs and rapid advancement, we can seize technology and product opportunities. Otherwise, we will only be stuck in the quagmire of product homogeneity and cannot extricate ourselves.
3
Demand guidance and seize new opportunities
With the development of technological innovation and application, many product opportunities also arise, which may be opportunities or traps. Whether you can choose the right opportunity and whether you can seize it is luck and fate.
There are also such companies in the domestic chip industry. In the process of expansion, they have chosen the right technology and product direction and seized the opportunity. In the process of expansion, the protection of funds is a prerequisite.
Die by buyback
With the arrival of the capital winter, some chip startups will die from buybacks.
Repurchase agreements are standard terms for financing chip startups. Fund investments have a limited term, ranging from 8 to 10 years and 3 to 5 years. Most repurchase agreements are between 3 and 5 years. If chip startups cannot go public during this period, investors are likely to initiate repurchase agreements.
Let’s take a look at Articles 71 and 137 of the Company Law. The terms agreed between the equity investment fund and the target company for the target company’s shareholders to repurchase the equity investment fund’s equity in the target company are in nature an equity transfer. In judicial practice, the court generally considers that the equity repurchase agreement signed between investors and shareholders should be respected as long as it does not violate the statutory invalidity of the contract and does not infringe on the interests of the target company and its creditors and other related parties. The freedom of contract and autonomy of will between the parties determine that the repurchase clause is legal and valid. When the repurchase clause stipulated in the contract is fulfilled, the investor has the right to request the shareholder to fully perform its repurchase obligations.
The repurchase agreement in the investment agreement is real and effective, and it is a sword of Damocles hanging over the heads of entrepreneurs. In the past, when the chip industry was very hot, entrepreneurs would not care about this clause, because the valuation rose rapidly and the book investment income increased significantly. Even if investors initiated a repurchase agreement, there would be new investors to take over. Once the capital cools down, the valuation returns to rationality, the market rolls inward, and the listing time is extended, the risks faced by startups are great. Investors will face the risk of funds and the pressure of LPs, and the repurchase agreement will be initiated. Either new investors will take over the old shares, or the cash in the company's account will be withdrawn. There is no doubt that some chip companies will die from repurchases.
Next, the domestic chip industry will enter the knockout round, and most chip startups will go bankrupt. Seeing their investment being wasted, investors will quickly initiate repurchase agreements and stop losses in a timely manner. In this way, it accelerates the death of chip startups.
How to avoid repurchase agreements killing the company? Not signing a repurchase agreement can avoid such risks, but the repurchase agreement is a regular clause. Unless the startup company has many financing options, it will not get investment if it does not accept it. At the operational level, to avoid the negative consequences of triggering a repurchase agreement is to appropriately lower the valuation in the early stage of financing, and then quickly increase the valuation when the company's products and performance have improved, it can be among the top three in the market, or it has the opportunity to go public. Financing. At this time, the previous investors will not choose to withdraw. Even if they choose to withdraw, a large number of investors are willing to take over the equity.
A low valuation in the early stage will cause the startup company to dilute a larger share of its equity, requiring it to be very frugal and cautious in capital allocation, but it can give the startup company a greater sense of security.
Die by valuation
The last round of capital overheating often leads to a capital winter. In the past two years, fierce competition among investment institutions in the semiconductor industry has led some institutions to prioritize ensuring that they can "get it" and invest in semiconductor projects at high valuations, thus pushing up the overall valuation of the industry. Capital will not dare to act rashly until valuations return to rationality.
Obviously, in the domestic semiconductor sector, investors in the secondary market are much calmer than investors in the primary market. The market value of listed companies is not high, which directly lowers the valuation given to chip startups by investors in the primary market. There may even be an inversion in valuation between the secondary market and the primary market. Under such circumstances, high valuations in the primary market make it impossible to raise funds unless the company goes public to raise funds in the secondary market.
In the primary market, is it possible to raise capital at a lower valuation? Obviously not, the bottom line is that it can follow the previous round of financing at the same valuation. If the primary market still feels that the valuation is too high, then the financing path will not work, and the company will either go bankrupt or be acquired. In the previous investment agreement, it was clearly stipulated that the target company or the actual controller shall not raise funds at a valuation lower than the previous round, otherwise it will need to compensate the losses of the previous round of investors.
This kind of high valuation usually occurs after Series B or after Series B. Companies that need Series B financing have already reached a certain scale regardless of the number of employees or R&D investment. Compared with companies that need Series A financing, their monthly costs are Payouts are much higher. Coupled with the crowded track and serious product homogeneity, there is no profit from sales alone, and there is no way to generate positive cash flow. If we say that in the early stages of starting a business before getting the Series A, entrepreneurs can still tighten their belts to get by, but for companies after the Series A, any form of rupture in the capital chain is fatal.
On the other hand, false valuations in the market can easily mislead entrepreneurs, making them mistakenly believe that their companies are fully capable of bearing such high valuations, and therefore they will be happy to believe the exaggerated numbers reported by others. , thinking that through this, they can obtain more financing for themselves and thereby obtain more benefits. This mentality ultimately harms others and ourselves.
Therefore, the most important thing is that entrepreneurs should have a correct valuation space for their company and maintain a certain degree of flexibility so that they can adjust the valuation at any time as the market heat changes. The purpose of this is to make the valuation better Accepted by the investor. In fact, in the C round stage, the most important thing is not the valuation, but the speed. Whoever can sign contracts with investors and deliver the goods the fastest will have an advantage and reduce a lot of uncertainty.
In order to avoid dying due to valuation, startups must reserve sufficient funds before Series B or Series C financing. The time interval between angel round and A round financing is very short, and the financiers do not need to consider the issue of funds, but the interval between A round and B round, B and C round financing may be very long. According to incomplete statistics, about 60% of startup companies in recent years have "died" in rounds A to B of financing, and less than 12% can survive to round C. Do it and cherish it, be careful of overvaluation.
died on the market
QiChacha data shows that there are 142,900 chip-related companies in my country. In the first half of 2022, there were 30,800 new chip-related companies in my country. In terms of regional distribution, Guangdong ranks first with 47,400 chip-related companies. Jiangsu and Shandong have 16,900 and 8,700 chip-related companies respectively, ranking among the top three. After that, they were Zhejiang, Shanghai, Shaanxi, etc. Most companies have no substantial chip business.
However, the number of chip design companies in mainland China is relatively real. Statistics from ICCAD show that the number of chip design companies in mainland China will reach 2,810 in 2021, an increase of 26.7% from 2,218 in 2020. It is worth noting that there were only 1,780 local chip design companies in 2019, with a significant increase in the past two years.
Looking at the picture below, mainland China only accounts for 9% of the world in chip design (fabless). In other words, the 2,810 domestic companies only account for 9% of the global share, but the number of companies far exceeds the global total.
According to industry data from the China Semiconductor Association, it is estimated that 413 chip design companies will have sales of more than 100 million yuan in 2021, an increase of 42.9% from 289 in 2020. In 2021, the sales of these 413 companies were 328.8 billion yuan, up from 305 billion yuan the previous year, accounting for 71.7% of the entire industry's sales.
Following this trend, there will soon be 500 domestic chip design companies with annual sales exceeding 200 million yuan. Can the Science and Technology Innovation Board accommodate so many listed chip design companies?
Objectively speaking, the Science and Technology Innovation Board cannot accommodate so many listed chip design companies. Even if they are listed, they will have no market value and liquidity. Therefore, even if some unprofitable chip companies successfully go public, they will eventually die in the listing.
According to one option requirement for listing on the Science and Technology Innovation Board, the expected market value is not less than RMB 1.5 billion, the operating income in the most recent year is not less than RMB 200 million, and the cumulative R&D investment in the last three years accounts for no less than the proportion of the cumulative operating income in the last three years. Less than 15%. But there is no profit requirement, and it is precisely because of this that some chip startups have been born in China for the purpose of going public. If they cannot successfully go public, these companies will collapse directly without any chance of survival.
Chip companies that go public for the purpose of listing have three characteristics:
1 |
The products should be about the same, and we will not strive for excellence. Everything is for the sake of quick sales. |
2 |
Blindly increase product lines without looking at input and output, just to increase sales and valuation. |
3 |
Pursue the number of employees, regardless of per capita output, to make yourself look like a big company. |
Chip companies that go public for the sake of going public are most eager to cut prices to increase sales, and just want to go public quickly. Because these companies know that their purpose is not to make good products, not to replace domestic products, but more to replace domestic products to increase sales. If there are more such companies, more companies will die before going public, and more companies will die after going public.
write at the end
Accept the reality and face the future; seize the opportunity and give it a try. To win, you must understand. Understand the industry, products, technology, market, management, operations, financing, and competition landscape and strategies. Who doesn't understand? If you make one careless move, you will lose everything.
The era of extensive chip entrepreneurship has passed, and the requirements for entrepreneurs and entrepreneurial teams will become increasingly higher. Start-up companies must take into account both strategy and execution, and the execution and implementation of correct and effective strategies play a key role in the success or failure of start-up companies.
Finally, to borrow a passage from the founder of a listed chip company: "Before 2018, chip design companies made some achievements, IPO listings were rare, and countless chip design companies collapsed. Four years later, chip design companies Failure has become very rare, and IPO seems to be very common." After tasting, you will know the answer.
About the Author
Zhong Lin, Jinjiang Sanwu Microelectronics Co., Ltd.
zhonglin@gsrmicro.com
*Disclaimer: This article is original by the author. The content of the article is the personal opinion of the author. The reprinting by Semiconductor Industry Watch is only to convey a different point of view. It does not mean that Semiconductor Industry Watch agrees or supports the view. If you have any objections, please contact Semiconductor Industry Watch.
Today is the 3152nd content shared by "Semiconductor Industry Observation" with you. Welcome to pay attention.
Recommended reading
★ Chiplet is on the cusp of the storm. Some people are rushing in crazily, while others are drawing a clear line.
★ Materials expected to become the “best semiconductor”
Semiconductor Industry Watch
" Semiconductor's First Vertical Media "
Real-time professional original depth
Identify the QR code , reply to the keywords below, and read more
Wafers | Integrated circuits | Equipment | Automotive chips | Storage | TSMC | AI | Packaging
Reply
Submit an article
and read "How to Become a Member of "Semiconductor Industry Watch""
Reply Search and you can easily find other articles you are interested in!