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Crowdfunding Components & Risk Assessment

As the semiconductor industry has consolidated in the past 10 years, entrepreneurs have been forced to think differently about how to fund a great new idea. Venture capitalists, as we know, have cooled on the industry's ROI, to say the least!

But, not surprisingly, at that end of the design and supply chain, novel approaches have filled the VC gap because great ideas abhor a vacuum. Friends and family have become significant investors in startups. Often, entrepreneurs simply fund the endeavor out of their own pocket, working on their ideas at night or moonlighting to make ends meet.

But technology today offers a new avenue, crowdfunding, courtesy of web-based companies such as Kickstarter and Indiegogo.

They came, they saw, they invested
The idea is simple: Put your idea online and entice the crowd to fund it, often in exchange for early access to the product.

Our industry's most famous example so far is Andreas Olofsson and his team at Adapteva, which designs powerful multicore DSP engines from a small office on the old Battle Road in Lexington, Mass.

Adapteva had already churned out successful designs when it wanted to go a step further, but being a startup, needed additional funding. Into the Kickstarter crucible Olofsson dived, and shortly, he'd pulled in more than his $750,000 goal and almost overnight built a new developer community in the process.

Now comes a Harvard-trained biochemist and part-time R&B singer, Elliott Small, who has licensed Georgia Tech patents to try his hand at a smarter, faster lithium-ion battery-charging system.

You get the idea: The dam is about to burst on this.

But getting an idea to prototype in this fashion in one thing — and one level of risk management.

Scale problems?
How does it scale and how does it ripple down the supply chain? The fact of the matter is, as the semiconductor industry has evolved in the past 60 years, it has built in a rock-ribbed risk-management profile.

Good ideas, when they emerge within companies, are thoroughly vetted by engineering and finance (is there a business case?).

Ideas that don't get traction inside companies often become discrete startups, vetted by experienced venture capitalists, who are often are ex-engineers and former finance guys. And since most buyers are inherently cautious, the startup component-company needs a level of validation from a big customer. That's just another layer of risk assessment for the larger potential market.

Once that happens, everything becomes smooth sailing, overflowing orders and early retirement on warm beaches with little umbrella-festooned drinks in hand. (Yeah, right!)

How much different?
There's little doubt in my mind that crowdfunding will become accepted and more common in our industry in three to five years. But how much more common is the $64,000 question?

This model for our industry isn't the same as it is for consumer segments, where you can get early access to that great fast charger, for example. For one thing, the potential investor-audience is a lot smaller. In Adapteva's case, it was obviously a smaller audience, but investors got early access to the technology as well, but it's big T technology and the lure for developers was unusual and great.

As more and smaller iterative (and no less valid) ideas go the crowdfunding route (relatively simple logic devices, A/D and D/A converters, and other components, MEMs devices, for example):

  • How willing do you think the engineering audience will be to support the R&D?
  • Will the risk-assessment routine for purchasers eyeing crowdfunded commercial devices be any different than for traditionally developed components?
  • What delivery, security, and reliability demands do you think will be required of the innovators?

25 comments on “Crowdfunding Components & Risk Assessment

  1. Houngbo_Hospice
    February 16, 2013

    “the potential investor-audience is a lot smaller.”

    It seems like not many believe in crowdfunding. The concept may only take off if investors are sure they can get their money back.

  2. Houngbo_Hospice
    February 16, 2013

    Consolidated also means stability and stagnation. The industry does need new and creative minds. But consolidation is not a bad thing as it reassures the big investors.

  3. Houngbo_Hospice
    February 16, 2013

    @Rich,

    “Another grand and glorious Golden Age of Prosperity.”

    That is a way to see this, I wish I were part of that “grand and glorious Golden Age of Prosperity”. I guess it is something to be grand and prosperious.

  4. Ashu001
    February 17, 2013

    Brian,

    Please do correct me if I am wrong about this issue but this Crowdfunding Idea recieved a massive fillip thanks to the Obama Jobs Act.

    Correct?

    Why can't the inventors offer Shares in the Venture in return for Cash donations?

    They can decide well in advance how many Shares they believe Venture has and how much should each share be worth.

    I am sure offering Partial Ownership here will make This Crowdfunding idea even more attractive for Funders.

    Regards

    Ashish.

  5. Mr. Roques
    February 17, 2013

    first of all, i love the crowd funding idea. Is it here to replace angel investors? Half way between them and venture capitalists? Substitute everything? You need more than an idea to succeed.

  6. Ashu001
    February 17, 2013

    Mr Roques,

    I like the idea too.

    It just adds more variety to the list of Fund-raising Option available to American Entepreneurs today.

    That's just the way I look at it.

    If you have actually given a Sales Pitch to a VC or Angel Investor;then you know how difficult it to raise funds from those two sources.

    Also,now with Banks having reduced Lending to unconventional sources sharply since the recession started in 2008;They have become more selective in which assets they invest in.

    In that scenario it makes sense for Crowdfunding to pick up atleast some of the Slack that these VCs have given up on.

     

  7. prabhakar_deosthali
    February 18, 2013

    I do support the idea of crowd funding as it provides the required capital to convert an idea into a salable product . As against the venture funding or equity allotment, there will be no undue pressure or interference from the crown funding to the creative design team and that gives the total freedom for the tech people to work their way to the product.

  8. Brian Fuller
    February 18, 2013

    Ashish, I think that's part of it, but the other driver is the fact that VCs just aren't funding electronics ideas the way they used to. Semi/electronics startups are seen as more expensive propositions (compared with pure software plays) with longer return cycles. 

    But I think your shares concept is a good one once the community figures out the legal issues surrounding that. Right now it's a lot easier if your “shares” come in the form of a prototype or early-access product. 

     

  9. Ashu001
    February 18, 2013

    Brian,

    Can I make a request?

    Can you do a a followup post for this Blog on the topic of  Obama's JOBS act?

    I believe Crowdfunding plays a very vital role in that act.

    Many Thanks

    Ashish.

     

  10. Brian Fuller
    February 18, 2013

    Ashish, excellent suggestion. I'll put that on my list of posts for the week… 

    Thank you!

     

  11. FLYINGSCOT
    February 18, 2013

    I have heard of crowdfunding for things like small personal loans to higher risk people but never really seen crowdfundind applied to successful electronics companies.  Are there any good examples of companies that started this way and are now at the next stage of company development?

  12. Brian Fuller
    February 18, 2013

    @flyingscot, the only two examples I've come across so far are Adapteva and Elliott Small's endeavor, both referenced in the story.

    I think it's early in the arc of crowdfunding for our industry, however, Adapteva Kickstarter project was a success, so I anticipate more.

    Let us know if you come across any!

     

  13. Taimoor Zubar
    February 19, 2013

    @Brian: Don't you think convincing the public about a certain idea and then gathering funds from them can take a considerable amount of time? Would it not be much quicker to get funding from a single VC or a few of them? Have the companies you mentioned faced this issue?

  14. Taimoor Zubar
    February 19, 2013

    I think the problem with issuing shares to the public is that the company needs to be a public-listed entity if it wants to float a large number of shares in the market. Normally, companies tend to be private for the initial period and later go for IPO once they're successful. This is why I believe the crowfunding idea cannot work with the shares model.

  15. Taimoor Zubar
    February 19, 2013

    “I think it's early in the arc of crowdfunding for our industry, however, Adapteva Kickstarter project was a success, so I anticipate more.”

    @Brian: Did these companies receive multiple rounds of funding through the crowdsourcing methods? Did the confidence from the investors remain stagnant throughout? Also, what about the quality of returns on such projects?

  16. Brian Fuller
    February 20, 2013

    @taimoorz, these are two distinctly different crowdfunding experiences. In the case of Mr. Small, he's trying to raise a relatively small amount of money and may or may not be getting traction right now. 

    In Adapteva's case, Andreas Olofsson had already built a small DSP company with his (and other founders') own capital. He went the kickstarter route to help fund a rev of Adapteva's technology that, I believe, he couldn't get from potential or existing customers. 

    The return for the investors was early access to design kits, product and so forth. 

    It's early to gauge the quality of the returns on such projects, but the approach, in my opinion, has been proven to work and the incentives–whether a consumer product or access to design schematics/boards/etc.–seem to be the right ones. 

     

  17. Brian Fuller
    February 20, 2013

    @taimoorz, good question partially answered in my other reply. Here's the issue with the timing: The crowd-funding sites I've heard of (Kickstarter/Indiegogo) put a strict time limit on the fund-raising period. In some cases, you don't get the money unless you surpass your goal; in other cases you can still keep some of the money if you don't. It depends on how you set it up. 

    VCs won't be interested in the vast majority of these ideas because they're small, or not as potentially lucrative as they're used to. 

    For the entrepreneur, no VCs means a little more control over his/her destiny. 

     

  18. syedzunair
    February 20, 2013

    That depends on the model you are using to raise money. Companies may opt for an intial IPO too to raise money in the short run. 

  19. syedzunair
    February 20, 2013

    Convincing people might take time but it will aslo ensure that shares are diluted in public and no one holder has a considerable say in the company. Initially people like to keep exclusivity to themselves and share as little of the firm to shareholders as required. 

    A VC may be a good option but it would give a large chunk to a single vendor/person. 

  20. syedzunair
    February 20, 2013

    Brian: 

    You are correct. Most of these projects will be so small that they would not appeal to the VC's. The VC's are considered by many to fund only projects that have a guaranteed future. 

  21. Mr. Roques
    February 25, 2013

    I would go to those crowdfunding sites first, mainly because they don't require a return, just some perks. Then angel investors (family, friends) and then, VCs to help build the company.

  22. Brian Fuller
    February 25, 2013

    @syed: have you considered using this crowdfunding approach? I'd love to hear from people who are. 

     

  23. Taimoor Zubar
    February 26, 2013

    The return for the investors was early access to design kits, product and so forth”

    @Brian: That's interesting. Normally, the investors tend to look for return in monetary terms so that they can compare it with other investments. This doesn't seem to be the case with this company.

  24. Taimoor Zubar
    February 26, 2013

    For the entrepreneur, no VCs means a little more control over his/her destiny”

    @Brian: I think there's still a trade off here. VC's might be taking away some control but they bring with them expertise and guidance and that's important for startup companies to grow. This might be missing in this case.

  25. Brian Fuller
    February 26, 2013

    Absolutely. No argument there. 

    In the case of Adapteva, I don't think that's an issue. But in cases like Elliott's that's a tradeoff you have to weigh. 

    Good point and thanks for raising it!

     

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