Matt Rhodes

Capital Lite Working GroupJanuary 24, 2011

Agenda

eSilicon, Lawrence Conrad

Synopsys, Kevin Maguire

Review Deliverables in Progress

White paper (Matt Rhodes)

- Toolkit (Jim Finch)

- IP Web site (Warren Savage)

Engagement process / flow (Ken Lawler)

VC Funding Impact on Semiconductors

Semiconductor Industry’s Relationship with Venture Capital has Fundamentally Changed

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

VC Funding

Fabless R&D

Year 2000: $17B Ind$2.6B VC Funding

Year 2010: >$100B Ind<$1B VC Funding

Starting a Semiconductor CompanyTaking on the “barriers to entry”

Access to “Necessary to Compete” and/or “Enabling” IP New Designs contain necessary but undifferentiated IP

- Basic IP: e.g. standard cell libraries, basic I/O

- Enabling IP: e.g. processor blocks

- Advanced or Application IP

e.g. High Speed I/O, security processors, MPEG Decode

Need for “Back-end” Infrastructure Layout, Timing Closure “flow” at advance process nodes

“Shuttle Runs” for IP Test Structures and Product Prototypes

Product Engineering resources and processes

Operations Infrastructure and Quality Systems

High Fixed Cost between Working Design and Volume Time to Volume depends on customer and market

Often measured in years while fixed costs continue

Cap-Lite Deliverables focus on Solutions

Cap-Lite Deliverable FrameworkTaking on the “barriers to entry”

Access to IP

Back-end

Risk/Cost to Volume

Cap-Lite Deliverables focus on Solutions

Cap-Lite Toolkit

• IP, Tools and Services accessible to start-up with other than early VC raised cash

• IP – IP Extreme will present a framework for creating access to IP

• Tools –

• Services –

• Non-Cash Currencies -• IP Warrants• Triggered Royalty• Others

• Extra Preferences• Convertible Debt

Cap-Lite Process

• Pioneer a new relationship between Venture raise money and existing industry players. Re-thinking the risk/reward for each of Venture Investor, Entrepreneur and Strategic Partner

White Paper

Objective:

Generate a GSA white paper that captures the thoughts and ideas developed within the working group and provide this as a tool for entrepreneurs to use when developing their business case to be considered as a candidate for participation

Structure

White Paper to be comprised of individual sections

- Each section will have a lead author responsible for developing detailed outline and content

- Section content will be submitted to GSA for editing and incorporation into final document

Timeline

Outlines: DEC 31

Section drafts: MAR 31

Completed document: MAY 31

White Paper

Outline

Abstract (Matt Rhodes)

Executive Summary (Matt Rhodes)

Problem Identification and quantification (Pagemill)

- Returns on Semiconductor Venture Investment

Exposition/Expansion of the Page Mill/USVP Presentation

- Framework for Maximizing return in the Semiconductor Startup

Exposition/Expansion of the Initial Problem Statement Framework

Semiconductor Start-up Genome

- Business case outlining the six stages of a start-up, similar to the Genome Report: Discovery, Validation, Efficiency, Scale, Profit Maximization, Renewal (Wade)

- Targeted investment profile (t.b.d.)

- Case Studies of Successful Start-ups (t.b.d.)

Toolkit* Development

Cap-Lite Toolkit

Summarize the tools available during the lifecycle of a semiconductor start-up, from initialization, through incubation.

- What does the start-up need to be aware of and what are their barriers to entry?

- What specific companies have programs tailored for start-ups to reduce up-front capital requirements?

*Section of whitepaper

Toolkit* Development

Structure

Introductory paragraph to each respective ecosystem segment

- EDA, IP, Foundry, Assembly & Test, Backend Operations, Finance, Legal

Introduction to each company participating in consortium

- Description of what tools / services they provide

- Description of available programs tailored for start-ups to reduce up-front capital requirements

- Description of Capital Lite investment models they are willing to consider and support

*Section of whitepaper

Toolkit* Development

Matrix summarizing each company and what they have to provide and under what models

- Propose targeted investment profile

- Equity for IP

- CAD for Equity

- Others

*Section of whitepaper

Capital Lite Models can Reduce Costs

• Tools, backend• SoC chip integration• Fab, packaging, test• Shipping

• Silicon-proven IP, SoCs• Embedded software and apps• Target Customer Relationships• Assurance for continuity of supply

• Marketing and product definition

• New IP creation & integration

• Core R&D

• Support

Sizeable

Semiconductors,

IP providers

Development

& Operations

Partner

Innovators,

Start-up team

New Class of “Capital Lite” Semi Start-up

Reduced start-up

Costs

Total $

spent

Use Caplite

Models to access without upfront

investment

eg: Fabs

Current Fabless

Semi Start-up

Proposed Capital-Lite Financing Models

Relevance

Sizable Semi

Company (“LargeCo”)

Benefit

Capital-lite Startup

(“Cap-lite”)

Benefit

EFI

Equity for IP

Focused on low ASP and

high volume markets

(eg. consumer)

Opportunity to

monetize IP

(balance sheet)

Avoids gross

margin compression

and future liability

TRL

Triggered Royalty

and License

Focused on higher ASPs

and mid volume markets

(eg. enterprise)

Opportunity to generate

revenues

(P&L)

Provides a balance

between

independence and

capital efficiency.

Minimizes dilution

EFEP

Equity Finance with

Extra Preferences

Focused on sharing

foundational IP, joint

marketing and R&D

Create Spin-in

opportunity

Minimizes execution

risks and capital

requirements

Equity For IP Warrants (EFI)

Model:

Cap-lite gives IP Warrants to LargeCo for IP components

IP Warrants

New class of warrants

Only valid upon qualifying events

- Example: change of control, liquidation, duration of existence, or a qualified IPO

Deal Goal:

LargeCo: Monetization of existing R&D, solution components

Cap-lite: Source proven, integrated solution and Software to reduce TIBE

A Note about IP Warrants

Some important features of IP warrants (IPWs):

New currency for capital-lite start-ups to source IP

Do not have voting rights; this prevents control by a LargeCo.

Only mature on a qualified event

- LargeCo realizes potential financial benefit only after a qualified event

LargeCo can potentially be shielded from expensing R&D costs by investing in IPWs

- IPWs should be carefully structured to avoid periodic remeasurement(mark-to-market accounting) of the IPWs.

Triggered Royalty License (TRL)

Model:

Postpones license and royalty fee payouts that can significantly reduce TIBE

- Example of qualifying events: change of control, liquidation, duration of existence, revenue target or a qualified IPO

Accounting Treatment (requires case-by-case evaluation)

It is worthy to note that this model does not involve an equity investment and avoids accounting consolidation if the agreement is not so pervasive that LargeCo can be deemed to control Cap-lite.

Deal Goal:

LargeCo: Monetization of existing R&D, solution components

Cap-lite: Source proven, integrated solution and Software to reduce TIBE

Equity Financing with Extra Preferences (EFEP)

Model:

LargeCo provides financing and IP to Cap-lite Start-up

Start-up must achieve some goals before triggering predetermined valuation and acquisition metrics

Accounting Consolidation (requires case-by-case evaluation)

LargeCo will most likely have to consolidate expenses of Cap-lite Start-up in GAAP expenses

Since Cap-lite can get acquired by any company it is possible to exclude Cap-lite expenses from Non-GAAP expenses

Deal Goal:

LargeCo: Option to acquire start-up as spin-in

Cap-lite: Build company for acquisition by sponsor

Xena™ Overview

What is Xena?

Xena is a complete platform for managing and using IP

Packaging, Cataloging, Delivering, Using, Supporting

Xena is built to support a broad range of uses for

Semiconductor companies

IP companies

Service Companies

Licensed under two models

Software service in the cloud (Xena Cloud)

License to host on your servers (Xena Enterprise)

Slide 18

Connecting the IP Provider to IP User

Slide 19

Designing ProductionReleasing

Cataloging Licensing Supporting

Shopping Purchasing Using

Bro

wse

De

live

r

Su

pp

ort

IP User Activities

IP Provider Activities

Activities by User Type

Produce

Package

Upload

Release

Support

Manage

Setup Catalog

Manage Leads

Product Lifecycle

Product Support

Reporting

License

User Accounts

Control Access

Watermark IP

Reporting

Support

Ticketing system

Publishing

Filesharing

Reporting

Catalog

Search

Browse

Learn

Use

Configure

Timing

EDA script gen

Download

Get support

Slide 20

IP USER ACTIVITIESIP PROVIDER ACTIVITIES

Xena Product Offerings

License

$200/Member user/month

Tiered volume discounts

Standard catalog format

Unlimited catalog entries

Unlimited IP titles

Customers free

Hosting

Private cloud server

Dedicated IP address

Administered by IPextreme

License

Annual subscription

Customizable catalog format

Unlimited catalog entries

Unlimited users

Unlimited IP titles

Unlimited member companies

Customers free

Hosting

Private company server

Administered by company

Slide 21

Catalog Key Features

•Configurable Hierarchy

•Configurable Attributes

Categorization

•Browse by category

•Browse by provider

•Search by keyword

•Filter by attribute

Browse & Search

•Public view

•HTML format

•Remote URL (link to website)

Datasheet

•Public or Private view

•User manuals

•White papers

•FAQ

•Success stories

•Customer testimonials

Product Collateral

•Catalog users can create notes associated with each IP in catalog

•Notes can be either private or public to other people in your company

Create Notes

•Projects are containers for storing documents and other notes around a project theme

Create Project

•“Request more info”

•“Tell a friend” referral

•Email notification

•Salesforce.comintegration

Marketing Tools

Slide 22

Catalog Home Page

Slide 23

Datasheet View

Slide 24

Example – Capital Lite Implementation

GSA Cloud Server

EDA Supplier 1

Member Users

Customer Users

Services Supplier 1

Member Users

Customer Users

IP Supplier 1

Member Users

Customer Users

IP Supplier

2

Member Users

Customer Users

Guest Users

Hosted on a GSA branded cloud server

Participating companies can list their offerings on the site

Visible via catalog feature

Access controlled by participating company

Guest users must register to get access

Slide 25

IPextreme Offer to Capital Lite

Offer a Xena installation for Capital Lite for free

GSA branded installation (logo, CSS, etc)

IPextreme manages

Participating Capital Lite companies get

1 free user license per company

Full access to all capabilities

Complete self-management of their products

Right to add more users at the std. Xena Cloud $200/user/mo. rate

Getting started

Setting up the server

Defining catalog hierarchy and search attributes

Identifying companies who desire member accounts

Slide 26

Traditional VC Engagement Process

Basic product/

market concept

Technology

differentiation/

competitive

advantage

Fundamentals of a

business plan

Core founding

team identified

Detailed due diligence

Product features and differentiation

Competitive analysis

Market Size

Potential customer feedback

Team references

Preliminary development timeline and proposed milestones

Financing strategy

Risk assessment

Exit return potential

Potential iteration

to business plan

Decision to fund

company (yes/no)

If Yes:

Term sheet

negotiations

Complete legal

docs

Money flows

Entrepreneur Initiates Diligence Process Process To Close

Problems with Traditional Approach

To offset heavy losses from failed companies, VC’s have to invest only in potential home run Start-ups

No collaboration with Strategics because they are viewed as competition and direct investment limits upside

As the few Start-ups that succeed reach maturity, the acquirers hold the power and drive down exit values

Inadequate returns from M&A lead VC’s to reduce focus on the sector and a vicious cycle is created

A completely new model for investment is required to rebalance the relationship between Start-ups and Strategics and revitalize start-up formation

Deal Flow – Engagement Strategy

Silicon Ventures

Entrepreneur Initiates

VC Fund Initiates

GSA or Strategic Referral

GSA /strategic partner knows

an existing company or a strong

startup team and believes they

are a solid funding candidate,

after initial meeting makes

referral to Silicon Ventures

Inception / Funding Process• Identify strategic partner and

eventual acquirer

• Heavy due diligence on start-up

technical team and fit to project

• Pre-negotiate acquisition details,

including milestones, timing, etc.

• Work closely with start-up to

facilitate development efforts, stay

on schedule and within capital budget

Using acquirer roadmap

as a to guide for team

formation efforts

Traditional approach

Ensure Team Skills Align to Roadmap

Agreement on Device to Build

Track Milestones

Driving Acquisition

Identify Partner Needs

Advantages to New Model

Not a traditional VC investment model where Start-ups and Strategics are often viewed as competitive

Not a Strategic internal direct investment which often results in unfavorable accounting treatment

Close collaboration between Start-up and Strategic creates incentive for win/win commercial agreements:

Sales and marketing

Product design, manufacturing and test

IP Licensing

Lower total capital requirements and higher probability of success for Start-up