Do Startups Have a Place in the Semiconductor Supply Chain?

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Early investors must understand that deep tech means patient money, with longer times to return.

www.eetimes.eu/, Jun. 22, 2023 – 

Startups are often viewed as engines of economic growth and job creation. However, in the semiconductor world, where new fabs cost tens of billions of dollars and a massive global footprint is required to participate in the supply chain, do startups really have a place?

When most people think of startups, semiconductors aren't usually the first thing that comes to mind. In a CB Insights classification of 1,206 startup unicorns that were separated into 15 groups, the few semiconductor unicorns that were included ended up classified under Hardware. They weren't even given their own category.

In fact, a quick perusal of the investment portfolios of Silicon Valley venture capital firms shows that the current investment landscape is populated with generative AI, health tech, e-commerce, fintech and software. If there is no home for startups in the birthplace of semiconductors, does this mean that semiconductors today meet the definition of a mature, commodity product, where incremental innovation provides no marginal benefit or cost advantage? Is participating in the supply chain too expensive, or have venture capitalists simply decided that other sectors provide a quicker path to commercialization and returns within their investment horizon?

It should be obvious that semiconductors are still benefiting from innovation. Each new generation of microprocessor has improved on its predecessor, delivering more computing power over the same basic piece of silicon real estate. Like compound interest, the ability to shrink transistors using innovations in lithography provides a growing return on investment. This is illustrated by the fact that the number of transistors on a microchip has in fact doubled approximately every two years since 1965, when the prediction was first made by Intel co-founder Gordon Moore.

Still, the innovations that drive transistor scaling are the domain of major industry players who can justify the massive R&D investments needed to develop the next process step. For example, Dutch company ASML, which specializes in the production of advanced lithography systems, invested a total of €3.1 billion in R&D in 2020. That figure represented approximately 14% of the company's net sales for the year–clearly not an appropriate place for startups to play.

I believe this perception is what keeps investors cautious when they hear "semiconductor" (or even "hardware" or "deep tech") in a startup pitch. Nevertheless, there are several subdomains in the semiconductor industry where startups can still thrive, play a pivotal role and provide outsized returns.

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