Investors: "Internet investment" does not work in the chip industry

On the one hand, the secondary market dissuaded 13 chip companies from investing, while on the other hand, hundreds of millions of dollars of investment frenzy were announced every day. Against the backdrop of the overall favorable conditions for the industry, the chip capital market was like a world of ice and fire.

"Billion" is becoming the standard quantifier for chip company financing.

There is no institution that does not invest in semiconductors in 2021. More than one executive of a chip company told me that many institutions would issue TS worth hundreds of millions of dollars just based on a phone call without even meeting the CEO.

“Not conducting due diligence is a common phenomenon, and the rush to issue TS is just to grab projects.”

Financing measured in billions is announced almost every day: Xinqiyuan, Xinyaohui, Moore Thread, Ecarx, Xingsi Semiconductor, Tianshu Zhixin, Evercore Shengzhi, Muxi Integrated Circuit, Xinhe Semiconductor, Dixin Technology, Hefei Changxin...

Relevant data show that as of September 1, 2020, the number of domestic semiconductor companies has exceeded 50,000. With the support of various VC, PE, and semiconductor industry funds, the national semiconductor industry investment amount has exceeded 500 billion.

But what is interesting is that from early December 2020 to early March 2021, the IPOs of 13 chip companies that were planning to go public were suspended or terminated, including some well-known star companies such as Yitu Technology and Unisound.

On the one hand, the secondary market dissuaded 13 chip companies from investing, while on the other hand, hundreds of millions of dollars of investment frenzy were announced every day. Against the backdrop of the overall favorable conditions for the industry, the chip capital market was like a world of ice and fire.

For chip companies, now is indeed a good time to raise funds.

Taking automotive chips alone as an example, US MarketResearch Future predicts that the compound annual growth rate of the global automotive chip market will be 12.87% between 2018 and 2023, and the market valuation can grow to US$72.4286 billion.

Specifically in China, the global automotive chip scale in 2020 was approximately 300 billion yuan, and China's independent automotive chip industry was only 7 billion yuan, with a market share of less than 2.5%.

Since the second half of 2020, the global automotive chip shortage has spread, and auto giants have reduced production and sales. The shortage has also affected smartphones and game consoles. For example, Huawei phones are harder to get than Moutai, and Xiaomi's Xiaomi 11 is also out of stock on a daily basis.

Therefore, whether it is a large-scale chip giant or a startup company that has just gathered a team and is looking for financing, they are all madly attracting investments.

The report "Interpretation of China's Semiconductor Industry Investment in 2020" shows that 2020 has become the year with the largest investment in the history of China's semiconductor primary market, with an investment amount of more than 140 billion yuan, nearly four times the amount in 2019. In addition, the proportion of investment after the C round has increased significantly, from 17.5% to 28.1%. Investment institutions are not only willing to "help get on the horse" but also "send it a way".

Take Horizon Robotics as an example. In December 2020, it announced the launch of a C round of financing of over US$700 million. At the same time, it claimed that it had completed a C1 round of financing of US$150 million led by 5Y Capital (formerly Morningside Capital), Hillhouse Capital, and Today Capital. Two weeks later, on January 7, it announced the completion of a C2 round of financing of US$400 million led by Baillie Gifford, Yunfeng Fund, CITIC Industrial Fund, and CATL.

Then, on February 9, it announced the completion of a $350 million round of C3 financing, which not only received heavy investments from top institutions such as SDIC, CICC Capital, and Zhongwei Capital, but also received strategic support from many star companies in the upstream and downstream of the automotive industry chain. So far, Horizon Robotics' C round of financing has reached a total of $900 million, exceeding the planned target.

Many automotive industry investors expressed regret that they failed to get Horizon Robotics shares because they were too popular. As chip supply becomes tight, Horizon Robotics' valuation continues to rise. In 2019, the valuation was about US$3 billion in the B round of financing; when the C round of financing was launched at the end of 2020, the pre-investment valuation was US$3.5 billion.

Startups also announced financing in quick succession:

On February 23, Xinqiyuanbu completed a Pre A2 round of financing worth hundreds of millions of yuan, led by Heli Capital;

On February 24, Xinyaohui announced the completion of Pre-A round of financing jointly invested by Sequoia China, Hillhouse Capital, Yunhui Capital and Gaorong Capital. As of this, its total financing amount has exceeded 400 million yuan;

On February 25, Moore Threads, which was established 100 days ago, announced that it had completed two rounds of financing totaling tens of billions of yuan, led by Shenzhen Capital Group, Sequoia Capital China Fund, and GGV;

On February 25, ECARX announced the completion of a $200 million Series A+ round of financing led by China State-owned Capital Venture Capital Fund. After this round of financing, ECARX's overall valuation exceeded $2 billion.

On February 25, Star Semiconductor announced that it had completed nearly RMB 400 million in Pre-A round of financing. This round of financing was led by CDH VGC;

On March 1, Tianshu Zhixin announced the completion of a RMB 1.2 billion Series C financing led by Yingbai Capital and Dacheng Capital.

Also on March 1, Evercore Technology received nearly RMB 300 million in Series A financing, led by Kunqiao Capital.

On March 8, Muxi Integrated Circuit announced the completion of its PreA+ round of financing, jointly led by Lightspeed China and Matrix Partners China. Previously, it announced the completion of nearly 100 million yuan of angel round financing in November. The company was just established in September 2020.

On March 8, Xinhe Semiconductor announced that it had completed a Pre-A round of financing worth hundreds of millions of yuan. This round of financing was led by Hengxin Huaye, followed by Fengyuan Capital and Linxin Investment. This is also the second round of financing of over 100 million yuan since its establishment more than a year ago.

On March 9, Dixin Technology announced that it had completed a nearly 100 million yuan Series A financing, led by Yinghua Capital, and followed by old shareholders Rockchip Microelectronics and Yanmucao Investment. In early January, it had just completed the previous round of financing from Inno Angel Fund, Qingsong Fund and Huarui Investment.

Hefei Changxin also announced at the beginning of this month that it is launching a financing of more than 10 billion yuan, which may even reach 20 billion yuan; but in December 2020, its parent company Ruili Integrated Circuit Co., Ltd. has completed 15.6 billion yuan in financing. Investors include the "Big Fund" Phase II, Anhui State-owned Assets, GigaDevice, Xiaomi Changjiang Industrial Fund and other institutions and leading companies.

At the same time, listed chip companies reaped the benefits of 2020. A total of 32 semiconductor companies went public this year, the highest number ever, with market capitalizations mostly ranging from 5 billion to 10 billion yuan. The average market capitalization of companies in the entire semiconductor industry increased by 40%-50%.

After all, the "Notice on Several Policies to Promote the High-Quality Development of the Integrated Circuit Industry and Software Industry in the New Era" issued by the State Council in August 2020 mentioned many times the need to speed up the conquest of "bottleneck" technologies in integrated circuits, and mentioned that my country's chip self-sufficiency rate must reach 70% by 2025. According to the demand of US$700 billion in 2025 and the self-sufficiency rate of 70%, China needs to produce US$490 billion worth of chips.

The good start of chip financing in 2021 is just the beginning of the fun in the track.

Behind the money-throwing investment is the competition among institutions for entry tickets.

According to statistics, in the first half of 2020, domestic listed semiconductor companies raised more than US$38 billion, or about RMB 250 billion, through various financing methods. There are also many unlisted semiconductor companies in China. With the support and investment of various VC, PE, and semiconductor industry funds, the national semiconductor industry investment amount has exceeded 500 billion.

The competition is more aggressive among the relevant institutions upstream and downstream of the industrial chain.

According to reports from China Securities Journal and other media, on March 5, OPPO completed its investment in power semiconductor company Vanguard Semiconductor; at the same time, chip manufacturer MediaTek announced that OPPO will invest in RF front-end company Vigor Semiconductor.

Since 2018, OPPO's investment in the chip field has been accelerating. Its subsidiary Shanghai Jinsheng Communication has expanded its business scope to include integrated circuit chip design. It has successively invested in Shanghai Nanxin Semiconductor, Shanghai Hanwei Microelectronics, Guangdong Weirong Electronic Technology, etc., and invested 50 million yuan in a Shenzhen semiconductor investment fund and invested in semiconductor company Changjing Technology.

As for Xiaomi, it has already invested in two chip companies in February alone. According to incomplete statistics, Xiaomi Yangtze River Industry Fund has invested in more than 40 chip-related companies, including Fangbang Co., Ltd., VeriSilicon Co., Ltd., Maxphotonics, Lihoxing, and GalaxyCore.

Huawei Hubble has also invested in at least 21 semiconductor companies in the past year. Huawei and Xiaomi have both made investments in various links of the semiconductor material, chip design, semiconductor equipment and other industrial chains, and even jointly invested in multiple companies, such as Zonghui Xingguang, Haoda Electronics, Onrui Micro, and SmartSens.

Great Wall Motors' strategic investment in Horizon Robotics is more straightforward. It is publicized that this marks Great Wall Motors' official entry into the chip industry. Great Wall Motors will develop rapidly in the chip industry through strategic investment, strategic cooperation and independent research and development.

VC/PE seeking financial investment is also entering the market in big strides.

Qiming Venture Partners partner Ye Guantai told me that when he first entered the VC industry in 2004, he was looking at semiconductors at Intel Capital and made successful investments. Now, he is looking at semiconductors again.

"In the past two or three years, China has attached great importance to the semiconductor industry to the highest level at the national level. With the strong support of national policies, although the global semiconductor industry is declining this year, China's semiconductor industry is rising. Of course, from the perspective of the entire industry, this has been the case for the past ten or twenty years."

In 2020, Hillhouse Capital made a systematic layout in hard technology projects including semiconductor chips, quantum and aerospace. The invested projects include Xinyaohui, Xinhuazhang, Star Semiconductor, Guoyi Quantum, Horizon, Zilliz and so on.

Gao Chao, managing partner and CEO of Yunxiu Capital, said in an interview with the Economic Observer that there are about 20 institutions in the primary market that invest in semiconductor projects for a long time, but in the past year, whether it is industrial funds, financial investment institutions, or institutions with state-owned backgrounds, they have all been looking at semiconductors, and the number is at least thousands.

"The 2019 Science and Technology Innovation Board has fully ignited venture capital in the semiconductor industry. Currently, dozens of semiconductor companies have been listed on the Science and Technology Innovation Board. According to statistics, based on initial fundraising alone, the Science and Technology Innovation Board has injected more than 70 billion yuan into 22 semiconductor companies. The "wealth effect" of the Science and Technology Innovation Board has reminded the primary market that investing in semiconductors is so profitable."

Of course, the continued attention and investment of the national team is also indispensable behind this.

On March 2, Zhao Huan, chairman of the China Development Bank, stated at a press conference held by the State Council Information Office that the bank plans to increase equity investment by more than 50 billion yuan this year, and will use the industrial investment funds and science and technology innovation funds managed by the Development Bank to continue to increase equity investment in integrated circuits, advanced manufacturing and scientific and technological innovation.

Zhao Huan said that the subsidiary has completed the first phase of the big fund's investment, and also participated in the establishment of the second phase of the National Integrated Circuit Industry Investment Fund, raising 200 billion yuan in funds, and has now fully entered the investment stage. In addition, in 2021, the bank plans to provide more than 400 billion yuan in loans to strategic emerging industries and advanced manufacturing industries.

In the integrated circuit chip manufacturing industry, the National Integrated Circuit Industry Fund (referred to as the "Big Fund"), which was co-founded by a subsidiary of China Development Bank, is the largest and most influential equity investment fund in the industry. The fund's first phase fund size is about 130 billion yuan, and the second phase fund has been raised. It will provide high-intensity support for semiconductor equipment such as etching machines, thin film equipment, testing equipment and cleaning equipment.

It can be said that there is sufficient ammunition and the project is just waiting to flourish.

Behind the massive investment, there are also issues worth worrying about.

In the wave of chip localization, companies have sprung up like mushrooms after rain, and it is common for them to defraud government subsidies and financing in the name of chips. Once the capital chain breaks, the chip projects left by these companies will become a mess, and there are many unfinished projects like Hongxin worth hundreds of millions of yuan.

Of course, many enterprise products have also been launched, including GPU startups with relatively high difficulty. Denglin Technology has announced that its first product has been successfully returned and sent samples to customers. Tianshu Zhixin announced that its 7nm GPGPU computing chip BI has been returned in November and successfully "lit up" in December, etc., which continuously stabilizes market expectations.

However, from product definition to design and tape-out, the chip manufacturing cycle is generally around 18-24 months. At present, most of these companies are in the early stages of establishment, and there are not many large-scale products, and more need time to verify.

Although a large number of companies have emerged in relatively low-end fields such as radio frequency, they have repeatedly engaged in price wars in order to compete for limited customers. The profit margins of the radio frequency chip industry have been continuously squeezed, and it is obviously no longer suitable for entrepreneurship and investment.

Therefore, on the one hand, some investors call for concentrating resources on major tasks, while on the other hand, some industry insiders advise investors to think carefully.

"VCs flocked to invest in PA RF chip startups, and eventually the gross profit margin of PA chips became 20%. It was originally a high-tech product, but achieving a gross profit margin of 20% is a very sad thing." Wang Lin, partner of Walden International, said at a semiconductor venture capital forum.

In his opinion, the irrational and unreasonable investment of primary market capital is dispersing the resources of the semiconductor industry. As many small and medium-sized companies with less than 100 employees have poured into this field, many VC institutions have followed suit, which has led to the dispersion of VC funds and semiconductor talents.

Therefore, Wang Lin said that the power of multiple capitals should be gathered to support a company. He gave an example, for example, if a domestic company wants to make a GPU, it may need to start with 1 billion US dollars. Only by concentrating resources to support a company and keeping warm together, as long as the team is good enough and persists for a long time, it will definitely get rewards and achieve the goal of localization.

For example, in the past 10 years, the largest amount of financing in the history of China's chip industry was the 150 billion yuan raised by Tsinghua Unigroup in 2017. At that time, it was invested by Huaxin Investment and China Development Bank, and Tsinghua Unigroup received an investment of 150 billion yuan.

But it was also with this investment that Tsinghua Unigroup successively acquired Spreadtrum Communications and RDA Microelectronics, then went abroad to establish a joint venture with Western Digital, and later invested in the establishment of Yangtze Memory Technologies, which has become the largest storage base in China.

In an interview with ChinaVenture, Yang Chonghe, founder of Lanqi Technology, said that as a high-tech company, especially a company that wants to engage in hard technology, the most important thing is to have solid technology and products.

"There are many high-return projects and scams now, so investors need to be a little calm . The way Internet investment works has now affected chip companies. They can raise a lot of money in a short period of time, but the characteristics of each industry are different. The chip industry is not an industry that can grow as fast as the Internet. We all need to respect the objective development laws of enterprises. The chip industry has its own development laws, and the Internet money-making plan is not easy to copy. "