US VCs euphoric; UK VCs gloomy. Why?

While the UK VCs talk about a constipated investment cycle due to lack of IPOs, the US VCs are talking boom-time again.

“The investment cycle is constipated at the moment,” said Jamie Urquhart, at the recent Silicon2010 seminar in Bath, “there’s Icera, Picochip and Plastic Logic all with over $100 million of investment and we need an exit so that the money will come back into the industry.”

“There is a problem [with a lack of] European tech IPOs but in the US there’s been 40 this year and that’s three times the number last year,” said Rupert Baines, marketing vp of picoChip.

Over in San Francisco at a VC meeting, Fred Wilson, of Union Square Ventures said this week: “People are getting crazy. In the early stage market, two-, three-person teams are getting $30, $40, $50 million valuations.”

At the same meeting,  John Doerr, partner in Kleiner Perkins Caufield and Byers, Silicon Valley’s premier VC company,  said: ” We’re in another bubble — or boom — and it’s an exciting time.”

The difference between US euphoria and UK constipation could be attributed to  understanding market requirements.

“We don’t seem to have the blend of technology and product marketing – how you listen to customers and what their needs are – that was a problem 30 years ago and it’s a problem now,” said Jamie Urquhart.

That strikes home. After all:

1.      MediaTek, with much inferior technology, made a vastly more successful assault on the Shenzai handset market than Icera;

2.      PlasticLogic’s decision to go up against Amazon and Sony in the end-product  e-reader market seems horribly misconceived;

3.      And to focus picoChip’s widely applicable generic technology to just two areas – Wimax and femtocell – has denied it the freedom of opportunism.

The  flexibility and freedom to pounce when a start-up sees a promising new emerging market area are advantages which start-ups should never relinquish.

They need those freedoms so they can take a ride on a  super-growth new product area as and when it unexpectedly rears its head.

But VCs, in their wisdom, can insist on start-ups sticking rigidly to executing  a pre-formed business plan – and that can prevent start-ups taking opportunistic advantage  of an unexpected new growth area.

Tomorrow morning: The Ten Best Locations For R&D



  1. Jamie’s comment “We don’t seem to have the blend of technology and product marketing – how you listen to customers and what their needs are – that was a problem 30 years ago and it’s a problem now,” is spot on – well almost. The product marketing is just one marketing layer up from the technology, and some UK companies manage that just fine.
    What they tend to really miss is the overall marketing strategy for their company – connecting their business value to the market opportunity. In the UK we have a tendency to be so technology centric we think we’ve cracked it when we manage to do some product marketing. sigh. At best all that does is help the sales guys sell – assuming they know where all the opportunity bodies are buried, which of course they don’t – and so often i see companies believe that all they need is some smart sales guys and and bit of promotion and sales support and its job done.
    The yanks know better – they (on average – they have their failures too) invest in marketing and refinement of their business value through that – and as such build value into the company rather than just scale up a bit of their technology potential.
    UK companies end up being valued as a function of their product and its product revenue potential, rather than as a business and its market potential – hence US VCs make more money on more successful exits.
    So no wonder we have a fiscal log jam now – and I am afraid to say the VCs are as much at fault through poor advice and guidance as their client companies.

  2. Rupert: I’m not yet certain I’ll go to MWC11, but if I do I’ll be sure to try and take you up on that offer, cheers 🙂
    On Icera: the best way to look at their position is to compare where they are to where they’d like to be. Look at – Stan Boland in mid-2008 was hoping for a $1.5 to $2B IPO on $150-200M of revenue in mid-2010. In January, he was hoping for a $600M-$1B IPO by the end of 2010. And in the FT article from October I linked above, he said they currently had revenues of ‘a few tens of million dollars a year’, which means based on the same valuation model they could still only IPO for a few hundred million dollars today. Not quite there yet!
    But the key is that the $150-200M estimate was based exclusively on data products, not smartphones. And there’s also a big extra opportunity with tablets today. So there is nothing fundamental or magical that prevents them to get revenue in excess of $100M by the end of 2011 (which IS substantially increasing their revenues – by 2 to 3x!) and presumably reach break-even with that.
    Combined with the promise of large smartphone design wins, I think that would be good enough to achieve a $1B IPO. Whether they are able to capitalise on their massive >4x die size advantage against Qualcomm depends on their execution and that of their customers, as well as operator trends for data products. We’ll see soon enough, I supoose! 🙂

  3. Well I think a good proportion of them are in Bath actually, Mike, which makes it rather convenient for Rupert.

  4. Yes carrying on this conversation over a drink would be a great idea. Where is your top 10 pubs in England list David ???????? 🙂

  5. An excellent idea, Rupert.

  6. Gosh: it is always nice to speak at an event and have some discussion afterwards.
    David: Rather be a target of concern, Picochip is actually the reverse – an example of success in precisely the way you urge.
    Yes, our technology is widely applicable. But businesses are built on customers, and solving problems not on “technology”. When you mention “freedom of opportunism” surely the only point of an opportunity is to seize it?
    And the fact is that we have succesfully seized three opportunities (WiMAX, femtocells – and now LTE), and are shipping in volume with decent revenue is a good thing, not a problem.
    We have indeed had “the flexibility and freedom to pounce” — that is precisely what we did, and why we are doing well in these areas.
    And we will “pounce” in other areas too in the future 😉
    @Mike The quote on 33% vs 5% was from my speach: it came from Lord Mandelson. I would like to believe it, and surely we can’t say he is wrong (!), but I’m not sure it can quite be right. 33% of pension funds would be a HUGE amount.
    @Arun. We should discuss over a drink 🙂

  7. Arun, I totally agree Picochip aren’t in the big LTE basestation market but Shannon’s Law dictates that the range of LTE has to be restricted to give the data rates required so there will be many more in-fill picocells than currently exist in 3G. Of course if smaller operators offer this service as well it would increase their sales but I think it key that they get the likes of Vodafone et al on-board with service models that use products using Picochip’s chips.
    And as you say Broadcom have also noticed all of this as well ! One of Scott’s better moves. But there are others Picochip could work/merge with to achieve the same goal.

  8. Yes indeed, Arun, it’s going to be interesting to see if they can IPO without very substantially increasing their revenues.

  9. Mike, I haven’t followed Picochip much recently, but my understanding was that while they had very strong WiMax basestation penetration, they don’t in traditional large LTE basestations. So their opportunity there is smaller cells, whose schedule obviously lag behind quite a lot…
    I think the really *massive* opportunity that could turn Picochip into a billion dollar company is direct integration of public femtocells into wireline modems (ideally FiOS) by double/triple-play operators, so as to let the operators truly build their next-gen networks that way. I have seen people mention this possibility (including AT&T I think), but it’s still a very long-term thing. I suspect this is part of the reason for Broadcom’s acquisition of Percello, and that (unfortunately for Picochip) gives them a clear integration advantage there.

    On Icera, I agree with your argument David, but I think your premises are wrong. Icera cannot compete in the 2G-only market and China only launched their 3G networks in 2009; it was 100% 2G before that. There are three different 3G standards: TD-SCDMA for China Mobile (the largest operator), HSPA for China Unicom, and CDMA for China Telecom.
    I said why TD-SCDMA and CDMA made no sense for Icera earlier, so this leaves us with China Unicom, which is only a small part of the market, and for which the vast majority of Shenzhen phones presumably remain 2G, and I’d kinda expect the only 3G ones to use proven chipsets with integrated application processing to reduce risk.
    There was one point where Option was aggressively trying to sell the Icera-based iCON 505 to China Unicom as a data modem afaik, but apparently their bid failed. Not much Icera can do there really. Their best bet is probably to get a direct relationship with China Unicom (like they have with many large operators) and convince them to ask specifically for Icera-based devices for performance reasons (or at least be agnostic about it and choose on a cost basis).
    It would certainly be very nice both for Icera (and the VC-backed industry in general) to get an IPO sooner rather than later. Personally I think they’re eventually going to settle on a date and run with it, likely before they get any large smartphone design in production. It’s very plausible for them to to achieve roughly break-even on the data market (including netbooks/tablets), and then simply tease something along the lines of ‘Major design wins for multiple phones at three Tier 1s, first revenue expected 6 months post-IPO’. Unless the economy is severely depressed and people are more risk-averse again, I expect that should be enough to wet investors’ appetites and get a very strong ROI for VCs.
    My guess? 4Q11 or 1Q12. We’ll see, won’t we? 🙂

  10. It just seemed to me, Arun, that Icera, now nearly ten years old, desperately meeds the revenues to justify an IPO, that handset design-ins are the best way to get those revenues, that the Shenzai design-ins were the most available design-ins, and that a software defined modem is a good base from which to give the Shenzai what they want.

  11. I agree with Arun on this that CDMA would be a dead end. Unfortunately for Picochip their prime market of LTE basestations, which will be required by the shedload to drive all our shiny smartphones, will take a few more years to mature so perhaps femtocells will keep them going until then. But it does mean any IPO is still some way off which is, as Jamie so eloquently put it, constipating the system.
    Another interesting statistic from the Bath event was that in the US 33% of pension funds goes into venture capital whereas in the UK it is about 5%. That probably explains why it always seems much easier to get funding over there.

  12. Wasn’t China Telecom on 2.5G-level CDMA until recently? Even with Icera’s massive die size advantage, I don’t think it’d be particularly attractive in the 2G market. As far as I can tell (don’t take my word as fact – feel free to ask them next time if you’re really curious I suppose), Icera is not pursuing the CDMA market, mostly because so many CDMA operators are either switching to WCDMA (see: Canada) or going all-out on LTE (see: Verizon). Given they’d be unlikely to achieve incredible market share, I do understand the reasoning.
    As for TD-SCDMA (which wouldn’t require that license anyway), there are two big problems here: first, there’s a fair bit of strong local and global competition. Second, it requires a new/different RF chip. Third, China Mobile wants to aggressively add TD-LTE to their entire TD-SCDMA footprint so that they can use some of the same phones as the rest of the world sooner rather than later. So TD-SCDMA never made any sense for Icera.
    It’s interesting that Verizon also said early this year that they wanted their entire 3G footprint to have LTE by the end of 2013, which means they could also use more common non-CDMA phones on their network. I’d kinda expect that to slip to 2014, but I suppose that really depends on the economy more than anything. Either way, does it make sense to invest in CDMA mostly for 2.5 years of designs (and probably not that much share) at a single operator? Probably not.
    IMO the only case where it’d make sense (and then it’d make VERY good sense) is if it meant Icera could have gotten a large design win at Apple (or even been acquired by them for a several truckloads of money). However you’ve got to choose your battles, and it’s understandable that they (and/or their VCs) wouldn’t want to risk everything on such a low probability outcome.

  13. Thanks Arun, it just seemed to me that a software upgradable modem with a CDMA license would be just what the mainland Chinese handset guys would want to get into the market and move into the new technologies at a relatively low cost.

  14. Given that Icera has not yet announced what will be their first all-out effort for smartphones (a new HSPA+ platform based on the 40nm baseband plus 65nm RF) and the Shenzhen market was exclusively 2G until very recently, I don’t think that’s a very fair assessment to say the least. It also seems to me Icera has been very receptive to their real customers in the data market; operators. And that has led to fairly good success there. This article also comes to mind:
    As for Picochip, I was very fortunate to stumble upon someone at their MWC 2009 stand who was extremely open about that kind of thing. At the time, they did have a design win for an imaging application, and were still interested in the wider market following the early demise of Ambrics (an US startup with some key architectural similarities).
    I also remember some earlier indications of interest in diversification. Evidently that did not pan out, and I suspect it’s not necessarily for lack of trying (even if more would have helped); they just decided after a while it wasn’t worth the effort anymore. Unfortunate really because I’m not very optimistic about femtocells personally and I don’t think picocells will really pick up as fast as they’d like, but we’ll see.

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