VC Focus Turns Away From Chips, Systems
Among other things, that means Drew Lanza, a Morgenthaler partner and longtime Light Reading contributor, will soon be out of a job.
And while Morgenthaler isn't alone, its decision bears particular weight on the Light Reading universe. The firm was a longtime believer in telecom and one of the last to keep up a strong presence at tradeshows like OFC after 2000, as the downturn began to slide.
Lanza says the decision came after lengthy, soul-searching debate among Morgenthaler's partners. In the end, the company decided that chips and systems -- expensive businesses that usually require long commitments -- aren't the gold mines they used to be.
"We are shifting to lighter-weight business models (e.g. Siri Inc. which was bought by Apple Inc. (Nasdaq: AAPL) weeks ago) and de-emphasizing investments in traditional semis, especially Series A," writes Ching Wu, Morgenthaler marketing director, in an email to Light Reading.
Morgenthaler certainly isn't giving up on the companies it's already funded. Cortina Systems Inc. and Peregrine Semiconductor Corp. are still going strong, for instance, and Morgenthaler did drop $2 million on chip startup R2 Semiconductor a year ago.
"Like the rest of the industry, we are not optimistic about new chip startups because of their huge capital requirements and the fact that many VCs have already chosen to de-emphasize this sector," Wu writes. "We however believe in our existing chip companies, almost all of which are shipping products, and those of our VC brethren."
Lanza would have preferred to see the company keep the faith in chips and systems, but he can understand the decision.
"Maybe that means there are one to three chip companies [funded] per year, but not enough to build a practice out of," he says.
Silicon Valley chip investment dried up some time ago. Lanza searched for local Series A deals for fabless companies and found R2 was the only one in 2009. He found none in 2008.
The implication is clear: Silicon Valley's startup machine has become a creature of software.
Plenty of questions spring up from this trend. Can large companies keep up the innovation pace that startups once did? Or, has hardware technology reached a point where all the truly hard work is on the software side for a while?
For the venture industry, there's a question, too: Can services and software absorb all this money that's sitting around?
"How do we take $20 billion a year in venture capital and stick it into iPhone apps or the next Facebook? Something is very broken here," Lanza says. "And I don't have a solution. In fact, I think I'm as much a part of the problem as anything. I keep saying 'Let's do chips,' and maybe that is the wrong thing. But where does it all go?"
— Craig Matsumoto, West Coast Editor, Light Reading