How Next-Gen Chipmakers Are Raising Money, Taking On Tech Giants

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their inventors can tweak them after an unfavorable test to try to make them work better, Trotter says. “That takes some of the risk out of it,” he says.

2. Early customer traction: After a successful tape-out, chip startups go on the road to try to land contracts with selected customers who will build their chips into the next version of the customer’s product, Trotter says. This phase doesn’t require as big a fundraising round, because a massive sales and marketing drive isn’t necessary. About $10 million to $20 million might do it—and scoring just a few customers counts for a win, he says.

“If you land one, you’re in a pretty good place,” Trotter says. Although it may be years before the product goes to market containing its chip, the startup may begin to earn non-recurring revenue for engineering work to customize the chip for the partner’s design, he says.

3. Manufacturing scale-up: When the customer’s device is ready to be made, the chipmaker gets a fab set up to crank out its chips, and as the device hits the market, the real revenue flows in for the chip developer. “Once they get going, it’s a good margin product,” Trotter says. The novel chip is not a long-used component sold at commodity prices, he says. The young company can then finance its operations based on the expected revenue.

4. The next generation of the next-gen chip: The startup can now work on a newer version of its innovative chip, Trotter says.

Which is the better investment—chips designed for edge computing, or for big data centers? Trotter says he often gets this question, and doesn’t have a definitive answer. “At least from what I see, there’s going to be a home for both,” he says. “The customers they’re talking to are quite different.”

According to an estimate by CB Insights last year, cited by CNBC, investing in chip startups was on pace to reach $1.6 billion in 2017. Trotter says we may be seeing a fraction of the potential right now, because the uses of AI-powered technology—in robotics, aerospace, transportation, virtual and augmented reality, and other applications—are barely beginning to hit the market.

“A lot of those companies are in the early stages of their development, like autonomous cars,” Trotter says. “As they become much more prevalent, the returns to chipmakers should grow in proportion.”

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