Fundraising for MEMS and semiconductor startups

Many successful startup companies need funding to succeed.  We recently spoke with Jeff Hilbert, EVP of Development and co-founder of WiSpry, about his experiences with the fundraising process and commercialization of MEMS technologies.  Mr. Hilbert has raised over $54 million in venture capital and debt financing to fund two of his semiconductor startups and has authored a chapter in a recently published book Semiconductor Venture Capital Best Practices.

MEMS Investor Journal: What are the key steps in the fundraising process for companies in MEMS and semiconductors space?

Jeff Hilbert: The first step for the company is to develop a business plan that defines an attractive market opportunity, identifies a set of differentiated, high value products to address the opportunity, and details out an affordable and believable execution plan to get the company into profitable product revenue.  Armed with the plan, a creditable core team needs to be assembled to execute the plan.  The team needs to be comprised of people who have been successful in the target market/product area and at least some of the team must have demonstrated success in VC-backed companies.  Finally, the team needs to identify and work with those VC firms whose investment focus, expertise and experience include the MEMS and semiconductor spaces.  The fundraising process involves building a funnel of such potential investment partners from which a small set of top prospects who are really interested in your company will emerge; one or more of these finalists will hopefully ultimately present your company with a term sheet for the financing round.

MEMS Investor Journal: How is the process different from other industries?

Jeff Hilbert: I don’t think the process itself is different but there are different points of emphasis and sensitivity.  I think MEMS still has a ways to go to be considered a proven implementation technology in many applications including areas such as consumer electronics.  Thus, questions may arise about technology risk, adoption, cost and reliability that are less likely to come up in, for example, a software start-up. There is also likely to be more focus on cash requirements to get to a first product and the timeline to an exit than for many other industries.

MEMS Investor Journal: What recommendations do you have for negotiating with VCs?

Jeff Hilbert: Remember that almost everything is negotiable, within reason.  Typically the major negotiation items are the amount of money to be raised and the valuation of the company.  It is always better to negotiate from a position of strength and one way to be in such a position is to have a record of doing what you said you would do when you said you would do it.  If you can line up competing term sheets without spending too much time shopping the deal you’ll be in a stronger position as well.  In the end, the best thing to do is to take money when it is offered to you.

MEMS Investor Journal: What are the things to watch out for?

Jeff Hilbert: Liquidation preferences, dividend and redemption rights, financial and reporting covenants, Board composition and no-shop clauses.

MEMS Investor Journal: What are some common misconceptions about VC financing?

Jeff Hilbert: One of the biggest misconceptions is that the VCs will end up running the company.  Another misconception is that there is so much venture capital out there to be invested that getting funded should be easy.  Although we hear about companies that get funded almost overnight, these are the rare exceptions – raising money always takes longer than you think it will.  And finally, many people believe that getting funded gets easier once you are funded.  This could be true but it depends on many factors only some of which are totally within the company’s control.

MEMS Investor Journal: What are the key differences with first and second financing rounds? 

Jeff Hilbert: Generally, with the second financing round a company is raising a larger amount of capital so questions about valuation and dilution come to the forefront.  In some cases where the first round is really a seed funding, the capital may have come from friends and family or angel investors.  And such a deal may have been structured as equity or convertible debt.  In this case, the second financing may be the first exposure to venture capital firms.  Board composition may also evolve as the company moves from technology development stage towards product introduction and revenue.

MEMS Investor Journal: What are the usual considerations of company management and VCs in later rounds?

Jeff Hilbert: Board composition and representation, preferences and rights of the various investor classes, capitalization table structure, employee ownership, dilution and refreshing of the stock option pool.

MEMS Investor Journal: What are the typical growth strategies for MEMS and semiconductor start up companies?

Jeff Hilbert: One growth strategy is to identify a high-value opportunity in an established and growing market segment that is unmet and for which your technology/product provides a differentiated solution that will allow you to establish market share and grow revenue.  If you can establish such a presence in the market while remaining under the competition’s radar so much the better.  The company can then grow from this foundation to provide additional products and address additional market segments or even new markets.  Solutions that are more transforming (versus being replacements) are generally better.  An opposite approach to this focused strategy is to try to grow in a horizontal direction by addressing many markets or applications in parallel.  While reducing some concentration risk, this strategy entails other real and perceived risks, may be harder to get funded and usually requires more cash.

MEMS Investor Journal: What are the growth strategies to avoid?

Jeff Hilbert: Over committing the company to deliver and running the risk of falling short.  Losing your focus or changing directions before you have initial success.  Growing at a rate that is not affordable in the long term – you have to spend money to make money and you have to have enough to succeed. Becoming overly-dependent on any one customer for your success is also risky.

MEMS Investor Journal: What is the main role of a MEMS start up CEO?

Jeff Hilbert: The role will shift over time and as the company grows but in general it is to raise capital, to represent the company in the industry and press, and to establish and model the company culture.

MEMS Investor Journal: What should the CEO’s process be to priorities and devise goals for the management team?

Jeff Hilbert: The goal and priority setting process should be a team exercise with the CEO as the leader and facilitator.  Goals and priorities should be set in a top-down process such that individual goals are allocated to the appropriate individual, synchronized between management team members, and then roll-up to company level goals that support the company’s annual operating plan and overall strategy.  Goals should be quantified and measurable whenever possible.  Allowances need to be made for goals to change under appropriate conditions.

MEMS Investor Journal: What makes a good VC partner?

Jeff Hilbert: Four items come to mind: (1) has a track record of investing in the space that your company is targeting, (2) has a network of connections and is able to make introductions to key people who can be beneficial to the company in ways beyond the cash investment, (3) has partners that can add operational, management, or mentoring expertise as Board members, and (4) is well-connected to other VC firms to facilitate future fund raising.

MEMS Investor Journal: What are the main exit strategy options for MEMS and semiconductor companies in today’s market environment?

Jeff Hilbert: Probably the most likely scenario is an acquisition by a customer or partner.  I believe an IPO exit is also still possible but has become a lot more difficult.

MEMS Investor Journal: When should an exit strategy be pursued?

Jeff Hilbert: The best time is when you have executed really well and maximized the number of available exit options open to you.  If you have twelve months of solid revenue growth, and can show good revenue and customer growth going forward, you are likely to maximize your valuation.  Depending on market conditions and the value of your products, technology and IP it is also possible to pursue an exit when you have just gotten your first product into production or even earlier, when you have proven your technology and IP in silicon.

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Jeff Hilbert is a co-founder of WiSpry, bringing over 30 years of executive management and technical experience in a number of leading semiconductor and MEMS companies including LSI Logic, Compass Design Automation, AMCC, Motorola, Harris and Coventor. Hilbert holds a bachelor of science in chemical engineering from the University of Florida and master of science in computer science from Florida Institute of Technology.

Comments

[vishal tilawala]

I have a queary about mems & nanotechnology that why we are saying that mems is a feature technology though there is nanatechnology which deals in nano scale?
please clear my doubt

[JS]

Very well written and informative article. Thank you!