How to Start Your Very Own EDA Company (Don’t run out of cash)
You’d need to search pretty hard to find two people more qualified than Jim Hogan and Paul McLellan to advise you on starting an EDA company. Hogan learned the ropes at Cadence under EDA entrepreneurial legend and demi-god Joe Costello and he then went on to sell Artisan to ARM. Hogan’s done some smaller EDA and non-EDA deals as well. McLellan’s list of EDA startups includes Compass Design Automation, Ambit, VaST, Virtutech, and Envis as well as a stint at Cadence. The pair of entrepreneurs obviously loves the EDA business much more than the technology of EDA, which is just fine because that was the subject of their hour-long presentation at DVcon last night. It was an off-Broadway rehearsal for a similar presentation at DAC later this year.
Hogan started the festivities by saying “So, you want to start an EDA company?” With the preliminaries out of the way, McLellan stepped up to the plate and gave the three cardinal rules for starting an EDA company:
- Don’t run out of cash
- Don’t run out of cash
- Don’t run out of cash
Then Hogan stepped back up with some hard realities for the audience. The IPO market is currently moribund and good return on startup investments need a good IPO market. (Hogan cursed US president Obama for not getting the economy in gear, though he’s rooting for the new president.) Failing a good IPO market, the only other exit strategy is a high-value acquisition—which also isn’t happening at this time. Currently, EDA companies are selling for 1.25 to 1.75x enterprise value (annual revenue – cash – debt). It’s trending to 3x, said Hogan, who sees an imminent acquisition cycle by the big EDA players (Cadence, Mentor, Synopsys) because “The big guys have been skipping oil changes” he said.
Although Hogan gave a lot of advice about starting, staffing, and marketing an EDA company (see his presentation here), the thing that most impressed me was his emphasis on small startups positioned for early acquisition. Find a few technical guys who can go without a salary for a year or two (because they each made $20 million in their last successful startup). Beg some free office space from someone with rows of empty cubes (common these days). Don’t hire a salesperson, a marketer, or even administrative help. Just get an idea to the first stage where you can successfully engage an early alpha customer. Get a big EDA player involved, sell the company for two or three million dollars, and split the proceeds. Repeat as needed.
This is a model for an agile mercenary development team that foregoes salary for big paydays every year or two. This idea catches the eye of the big EDA companies who depend on the agility of new, small players for fresh “oil” to keep their development engines turning.
Hogan also had strong advice about the type of EDA a startup you should pursue. “Avoid EDA classic” he said. Anything the big EDA companies already do is nearly unassailable because their superior distribution channel and wide customer base mean that your startup will not be able to dent the status quo unless you create something truly revolutionary. “It’s really, really hard” said Hogan. EDA Classic is anything in the design flow from RTL signoff to mask signoff.
Finally, Hogan and McLellan fully revealed their orientation in this presentation. “Sizzle is the highest leverage marketing point” said Hogan. You need an exciting story in the beginning. You need to convince the world that your chosen product category is the new, new thing no large EDA player can be without. If you succeed, then the big EDA players will start to hear questions from customers and analysts about their strategy and road map in this new category. In short order, there will be a rush to acquire the relevant startups in the category. “Don’t be third to be bought,” cautioned Hogan.
You can be too early. (The first mouse gets killed by the trap and doesn’t get the cheese. The second mouse might get the cheese in that case.)
You can also be too late. (The third mouse doesn’t get the cheese).
There’s a lot of luck involved in the process, concluded Hogan. “You have to have passion about it.”
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