Warren Savage On: The Naught Decade - Part 2

Warren Savage

Tuesday 19 January 2010 11:17

In last week's Part 1 of this series I commented on how the last decade marked a transitional period between the 20th and 21st century tech eras. As described in Part 1, the decade saw the disaggregation of the semiconductor supply chain which started in the 1980's come to a fully complete state and the EDA industry begin to feel the after-effects of this disaggregation which (ironically) fuelled their growth for the last 20 years.

This week in Part 2, we will discuss the changed roles of venture capital, private equity, and the shift of jobs to low cost regions.

Whither Venture Capital?

In the 80's and 90's, venture capitalism was at its height. The tech economy was growing at an explosive rate due to the adoption of personal computers and cell phones by the mass market. There were enough profits and money to go around that companies could afford to focus their main attention on driving profits and growth, and rely on a nice ecosystem of venture capitalists and entrepreneurs to develop new technology on their own coin and then simply buy the companies as a way to enter new markets with minimum risk. Often times the ideas were so good that the companies went public, making great profits for the entrepreneurs and investors alike.

However, like any good thing, it doesn't last forever. "Irrational exuberance" by investors in the dot-com era fuelled a record number of venture capitalist companies to raise money only to squander it on one hair-brained concept after another.

By the end of 2001, a full-on panic was underway, and by the end of 2002 their coffers had been emptied of billions. Today, venture capital is down to its lowest level of investment since the mid 1990's. When the tally is complete in the next months, we might see that venture capital produced a negative return on the whole for the entire 2000-2009 decade.

But, like good times, bad times don't last forever either. With the semiconductor industry completely restructured as we talked about in Part 1, there is opportunity for new ideas in semiconductor that the current players may not have the resources or risk appetite to invest in. I believe it's more likely that in the next decade we will see a return to the more stable and natural balance of venture-backed companies being funded, acquired, or going public along the lines of what we saw in the 1980's.

Private Equity takes a turn as Shiva the Destroyer

In Hindu religion, there are a multitude of gods, all of which have a certain specialty. Shiva is the god of destruction, and with her partners Brahma (the creator) and Vishnu (the preserver), combine to complete the lifecycle of birth, life, and death. Private equity firms like to think of themselves of serving the need to buy companies for the purpose of tearing them apart so that they can be reborn in a more profitable incarnation.

We have seen in the last few years two good examples of private equity firms in action with their takeover of Freescale Semiconductor (nee Motorola SPS) by The Blackstone Group and NXP Semiconductor (nee Philips Semiconductor) by Kohlberg Kravis Roberts and Silver Lake Partners in the last decade. The formula is somewhat the same: use leverage (i.e. debt) to buy the companies, saddle the company with the new debt load, sell off the least profitable (but perhaps strategic) assets, "trim" the costs and restructure to maximize cash flow.

It remains to be seen whether private equity takeovers of public companies can be successful in the rebirth of companies by taking them private. However well-intentioned, there is no doubt that the transformation process has not been helped by the business conditions we faced during the Naughty Decade. We'll just have to wait and see whether these grand experiments saved or destroyed these companies.

Jobs move away to cheaper locales, but the natives are restless

In the 1990's, here in Silicon Valley, but also all over the western world, there was a great flood of highly educated people coming here to work in the burgeoning tech economy. There were lines around the block at the local immigration offices for work visas. New graduates were parked in India and China waiting for their time to come to America to sit in a cube and type on a computer.

As Y2K approached, an interesting thing happened. We ran out of visas, but needed more and more people to work on software to ensure that on 12 midnight, January 1st, 2000, planes wouldn't start dropping from the sky. So instead of setting them up in cubes here in Silicon Valley, we set them up with Internet connections in cubes in Bangalore, India. And you know what? The work got done and at 10% the cost of a Silicon Valley worker.

Then, as the recession of 2001-2003 hit, companies started laying off people in the valley and hiring in Bangalore. A reverse immigration wave ensued with Indians and Chinese going back home. Top graduates were being recruited locally. There was no need to go to the US or Europe like their older siblings had done just 5 years before. You could build the good life close to home.

None of this is very surprising for those of us working in the technical community, and in fact is well-covered in one of my favourite books, Thomas Friedman's The World is Flat: A Brief History of the 21st Century. What may be surprising is that we may be reaching a point of elasticity in the off-shore movement.

Driven initially by an abundance of a young, eager, cheap, and skilled labour force, these people are growing up. A recent poll of engineers around the world shows growing resentment of "equal work for unequal pay" with many of these highly educated people in India and China considering career moves out of engineering. The result is a likely decreasing cost advantage for offshoring in the next decade, with a truly flat, multinational workforce designing our next generation electronics.

Part 3 will follow the week of January 25th and discuss the effects of the changes in the last decade on the IP business as it related to the semiconductor industry.

Warren Savage, President and CEO ofIPextreme, is a well-knownand published authority in the field of semiconductor intellectualproperty.

He has a long history of pushing the envelope of design methodologyfrom his work in fault tolerant computing at Tandem Computers inthe 1980's and driving reliable design methodologies intocommercial practice at Synopsys for its DesignWare IP product inthe 1990s. Much of his thinking became embodied in the seminal bookon IP reuse, the Reuse Methodology Manual.

Previous columns

(Nov 07)Warren Savage On: Making the Case forInventedHere

(Dec 07)Warren Savage On: Swiss Cheese Solutions

(Jan 08)Warren Savage On: Collaboration NeededforSuccess

(Feb 08)Warren Savage On: Knowing Your No

(Mar 08) Warren Savage On: The NextBigThing

(Apr 08) Warren Savage On: GummingUpthe Works?

(May 08) Warren Savage On: WaitingforGodot

(Jun 08) Warren Savage On: OurVirtualFuture

(Jul 08) Warren Savage On:BeingPlugged In

(Aug 08) Warren Savage On: The DogDaysof Summer

(Sep 08)Warren Savage On:Samurais,Sedans, and Semiconductors