EDA Suffering Funding Crisis

The EDA industry has been built on venture funding ever since its inception in the early eighties and it is no secret that the big three have relied on a steady stream of startup companies to provide some of the new ideas, to test out new technologies and expand the industry.

While there is a lot of research and development that goes on inside the large companies, most of this is related to the improvement of existing tool lines and necessary extensions to handle additional challenges brought about by the changing semiconductor fabrication technologies. Startups tackle new problems, develop new tools and create many of the growth opportunities. The CEOs of the large companies have often said that their growth comes from new markets while the more traditional areas tend to see little growth and often have decreasing margins.

But as we are well aware, EDA has not been favored by the VCs ever since the Web boom and bust came along. There are much better opportunities with much higher growth rates and a much faster time to money. I just read a Bloomberg article that talked about “how fervent the Silicon Valley startup landscape has become and how much it can take for investors to convince an entrepreneur to take their money. Startups have so much cash chasing after them that many entrepreneurs can pick and choose who they take funding from.” Don’t we wish we had that problem in EDA?

No longer do we see an EDA startup go from concept to success in three years, it is more like 10 or more years and many of those companies run out of money long before that time, leaving them as bargains to be gobbled up by one of the large companies for pennies on the dollar. This, of course, compounds the problem. In the past decade that has not been a single IPO in the EDA space, although there have been a few acquisitions that would be not be called fire sales.

Systemic growth rates inside the big three are in the low single digits and most growth either comes from or by extending their reach into adjacent spaces. Even the EDA companies see better opportunities outside of traditional EDA and that is where some are choosing to place their money.

It is also no secret that the number of EDA startups is drying up. Not only is there little money available, but few entrepreneurs within the industry believe that they will see success. The desire for success drives them more than money. It takes too long to develop a new tool given the complexity that is now required in terms of fitting into existing flows, tools and languages. For example, SystemVerilog is so complex that it would probably be beyond the reach of any startup to create a new simulator.

At DAC this year, there was only one first time exhibitor for a new EDA tool (DRC DA). The other new exhibitors were either IP companies, or companies in adjacent areas such as automotive that were exhibiting for the first time because of the automotive focus of the conference.

Another trend that we have been seeing is that EDA companies favor larger acquisitions. Buying a few-person company doesn’t tip the needle even slightly, and it can take too long to bring it into the corporate umbrella to the point where it can be successfully inserted into the sales channel.

As we look at the number of companies remaining, it may not be the big three that we talk about for much longer; it may soon just be “the three.” At that point, the remaining EDA companies will have to internally fund all of the new technology required instead of getting their research and development conducted for them at reduced rates. This will squeeze the margins within EDA even more and potentially hamper the rate of innovation. So will a white knight come along to save the industry?