Once the darling of capital and a veritable "land of gold," the semiconductor industry has faced several setbacks and is now entering a winter in the capital market.

"Invisible, afraid to invest, no money left" has become the prevailing tone throughout the industry, and the era of "blind investment in semiconductors can also make money" is declared to be over.

The direction of the capital market has changed!

As everyone knows, the semiconductor is an industry that requires huge initial investment and a long return period, and capital is extremely important for its development. Now, the shift in the capital market may be a "misfortune" for chip startups, especially those that rely on financing for blood transfusion and lack self-sustaining capabilities.

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The chip enterprise elimination race is accelerating!

The capital winter often means industry reshuffling, and chip enterprises are going bankrupt one after another.

In 2023, there were cases such as the dissolution of the 3,000-person team of ZEKU, and the abandonment of the struggle by the time chip storage company due to insolvency. Subsequently, domestic chip startups such as MOSING Semiconductor and FUREE Microelectronics have also been reported to have gone bankrupt.

Previously, chip enterprises such as NOVATEL Technology, which aspired to become "China Qualcomm," and the Arm CPU startup QILING Core, have also disappeared one after another.

The reasons for this include factors such as deviations in technical routes, strategic errors, or changes in key personnel, but the difficulty of financing + huge losses + poor profitability has become the heaviest straw that has crushed the company.

Semiconductors have three major characteristics: large investment, long cycle, and high risk.True research and development requires high investment, a long cycle, and considerable risk. For companies to maintain long-term, stable development, in addition to having advanced technology and mature products, they must also have stable income, profits, and cash flow. Otherwise, without a substantial influx of capital, it is difficult for semiconductor companies to make it to the end.

Therefore, in the current situation where the capital market is cooling down, the chip elimination race is accelerating.

According to data from Qichacha, in 2022, more than 5,700 chip-related companies in China were revoked or deregistered, a year-on-year increase of nearly 70%. In 2023, the number of bankruptcies and deregistrations of companies exceeded 10,000, with an increase of 90%, and the growth trend is obvious.

In addition to the surge in numbers, this chip elimination race has also affected a broader range of companies, including not only domestic start-ups but also international start-up star companies with certain technical R&D strengths.

The bankruptcy and closure of AI newcomer Wave Computing is still fresh in memory; not long ago, the American GaN start-up star NexGen Power Systems also suddenly announced bankruptcy; the British AI chip unicorn Graphcore, which just withdrew from the Chinese market, has recently been rumored to be for sale...

The reduction in capital liquidity, the slowdown in innovation, and the decline in consumer confidence have all greatly restricted the growth of these start-ups.

Especially in the down cycle, due to the disruption of supply and demand balance, the previous seller's market has turned into a buyer's market. In order to recover cash flow and maintain and seize more market share, many manufacturers have to choose to reduce prices and promote sales. But even so, in the face of weak demand, many companies' sales are still not improving, and there is a decline in both volume and price on the revenue side.

On the expenditure side, integrated circuits belong to a typical capital-intensive, technology-intensive, and talent-intensive industry. A chip manufacturer wants to have a certain competitiveness in the market, often requiring a large investment in R&D and production funds. Moreover, the technology in the chip industry is updated very quickly, requiring continuous R&D and product upgrades. Therefore, the investment cost in the chip industry is very high, leading to many companies being unable to bear the cost pressure.

The long-term result of not being able to cover the input, reflected in the operating data, is a significant decline in performance or even losses.In the past, during the heyday of the capital market, these were not actually issues. Because as long as the story was told well, with a certain level of technology and the ability to bring products to market, there was always a large amount of capital willing to pay for it. However, now, as the industry is on the downturn, the enthusiasm of capital is also cooling down in sync. Everyone has tightened their pockets, and funds are no longer as abundant as before, and companies lacking vitality gradually cannot get the next round of financing.

Therefore, in the current environment where internal self-sustaining capabilities are insufficient and external financing enthusiasm is declining, some startups are very likely to face the situation of being eliminated.

Atomic's managing partner and CEO, Jack Abraham, issued a warning: "Two-thirds of startups may not survive more than a year, and we are about to enter an era of massive extinction of startups."

Where is the way out for chip startups?

With the global economic recession and the continuous decline in the prosperity of the semiconductor industry, investors' previous fervent pursuit of semiconductor startups has begun to return to a calm reality. Semiconductor manufacturers, mainly startups, are stumbling and on the brink of bankruptcy due to a lack of funds.

Industry reshuffle may be inevitable.

Tsinghua University professor and chairman of the Integrated Circuit Design Branch of the China Semiconductor Industry Association, Wei Shaojun, shared data at ICCAD 2023 that in 2023, there were a total of 3,243 chip design companies in China, of which 1,910 companies had sales revenue of less than 10 million yuan, and the industry's "survival of the fittest" may continue.

Under the gloomy clouds, for chip startups, the first thing to consider is how to survive the capital winter, and where the path of self-rescue and breaking through is.

First, strive to survive.

Only by surviving do you have the opportunity.Zhong Lin, the founder of San Wu Microelectronics, stated that there are two paths for domestic chip companies to replace their products: one is to undercut prices to seize the market, and the other is to leverage new technologies to bring market opportunities for overtaking.

However, waiting for market opportunities brought by new technologies takes time, a period that domestic chip startups find hard to face and endure, with pressures from investors, supply chains, and internal company dynamics.

In the current chip industry, even the smallest market has a crowd of competitors. Almost every niche in the semiconductor field has at least dozens of startups. Without the advantage of being the first to market, it is already very difficult for latecomers to grow and develop using the same methods.

How to compete in this environment is a test for every chip startup.

Looking back at the industry's development history, around 2019 was the tipping point for the development of domestic chip industries. Before that, domestic chips had almost no application ecosystem. It was only after the supply chain crisis that the downstream of China's semiconductor industry truly developed. This period of less than five years is very short for the semiconductor industry, and it is unrealistic for products or technologies to reach the heights of overseas markets.

Therefore, overall, the competitiveness of domestic chip manufacturers cannot be significantly improved in a short period, and domestic chips still need a relatively long market verification cycle. For practitioners, adhering to "long-termism" is undoubtedly more important.

For this reason, in the trend of "retreating tide" in chip investment, it is recommended that current chip company founders spend money wisely and save where they should not.

Zhong Lin emphasized that in this capital winter, startups must cross the cycle to survive, learn to self-generate and be self-reliant in this harsh environment, and not to place too high expectations on capital. Even if they get the money, they should aim to quickly achieve self-sustainability. Learning to make money is a compulsory course for enterprises, and some enterprises may never learn it, but this lesson will have to be made up sooner or later.

Therefore, for semiconductor small and medium-sized companies with limited resources and capabilities, they can only take small steps and run slowly, seizing every small opportunity. Zhong Lin believes that the current urgent task for chip startups is to first survive and ensure the company's cash flow. Moreover, technology and products must keep up and be competitive, and as much as possible, increase R&D efforts. At the same time, market strategies and sales capabilities must be matched, and appropriate pricing strategies and market promotion strategies should be formulated according to their actual situations.

In the "sifting of the sand by the waves" of the market, to stand firm may mean everything.Breaking Free from Homogenization and Involution

A few years ago, during the era of "gold on the ground" in the semiconductor industry, a massive influx of capital led to a surge in the number of domestic chip companies, sprouting like mushrooms after a spring rain. This resulted in a large number of repetitive projects, and the valuations were generally inflated, creating many bubbles.

The consequences of this were a small, chaotic, and fragmented market, along with low-level repetition of technology and products. This has led to many semiconductor companies suffering from chronic losses, with the inability to become profitable becoming the norm.

At present, the "involution" in some low-end chip tracks in China is intensifying, with the phenomenon of "competing on price, fighting with patents, and replacing domestic with domestic" being widespread, leading to a red ocean of vicious competition in mid-to-low-end chips.

Profitability, which should be the most basic pursuit of chip startups, has now become a luxury. There is no significant difference in technology, products, or end-user demand.

Therefore, under the competition of product homogenization, most small and medium-sized chip companies are trapped in a dilemma of having products without sales, and having sales without profits, which is prone to a vicious cycle. Most chip design companies' financing funds generally last about 2 years. Without products and sales performance, it is difficult to proceed to the next round of financing, leading to a waste of a large amount of resources and the elimination of some companies.

In response, low-end domestic substitution needs to upgrade to high-end bottleneck areas.

The period of industry restructuring is often a golden time for the elimination of low-end technology, products, and production capacity, and for upgrading to high-value areas.

Zhong Lin said that in the short term of a few years, chip startups are unlikely to be eliminated through market competition. Even if investors stop investing, chip startups will continue to exist in an invisible way. Mature and stable mid-to-low-end chip products will continue to enter the market in new brand forms, without the need for upfront expenses or R&D investment, competing in the market at extremely low prices.

However, for chip companies to ultimately succeed, they must move towards high-end chips. Mid-to-low-end chips are always a quagmire, and once trapped, it is impossible to extricate themselves. Therefore, as a chip startup, it is necessary to ensure cash flow to survive first; secondly, technology and products must keep up, continuously moving towards the high end, and increasing R&D efforts as much as possible to create competitiveness; then, market strategy and sales capabilities must be matched, formulating appropriate pricing strategies and market promotion strategies according to one's actual situation. Good strategies can achieve victory with the weak over the strong, and with the few over the many.Wang Lin, the managing partner of Huadeng Technology, expressed to the author that "innovation" is always the unchanging driving force for the semiconductor industry to move forward. However, the "import substitution" wave in the past few years has made the innovation that should be most valued be neglected. Everyone is using mature technology to meet the substitution needs of the mature market, gradually forming endless "involution". But the space for innovation is infinite, whether it is technology or application, there are still many new opportunities for everyone to try.

Prudent expansion, balance investment and revenue

For chip companies, is the expansion of the product line or track an opportunity or a trap?

There is no uniform answer to this question, depending on the situation and timing of each company. But for most startups, expansion is very dangerous, often dying in expansion.

Zhong Lin pointed out that for startups, although expanding scale is the vision of every company, being eager to expand scale is like a startup poison. The premise of expanding scale is "burning money", and most startups do not have the ability to expand by their own profits, they can only rely on continuous financing. If there is a lack of later-stage financial support, the company will die.

On the other hand, if the team is too small and the product line is too much, it will over-distribute the company's resources and energy. Coupled with the high cost of chip development and slow iteration, once the strength is dispersed, it is more difficult to ensure the research and development progress.

Therefore, chip startups need to be "balanced" in both business and investment.

For the chip market in 2024, industry experts have said that in addition to paying attention to the industry cycle, they should also focus on the manufacturers' "self-rescue" actions, but self-rescue is often accompanied by risks and uncertainties.

Especially in the context of continuous expansion and burning money when profits do not meet expectations, it is undoubtedly a huge test of the company's patience and judgment.

Whether the success of research and development, expansion, and transformation can be fully demonstrated in a short period of time may be difficult, and the semiconductor industry cycle also has long and short. The price fluctuations caused by changes in supply and demand are short cycles, and their effects are reflected within a few quarters, while the rise and fall of downstream application industries are long cycles measured in years.In light of the current industry cycle and the sentiment in the capital markets, chip companies need to pursue new business opportunities while maintaining financial sustainability and prudently responding to industry changes. Walking this "tightrope" is not easy.

Furthermore, under the current circumstances, finding a new chip track with opportunities is extremely difficult, as almost every niche field is crowded with startups or dominated by established giants. Therefore, choosing a direction with technological evolution and iteration is particularly important. By making technological breakthroughs and rapid progress, companies can seize the technological and product advantage. Otherwise, they will be mired in the quagmire of product homogenization and unable to extricate themselves.

Being good at "mergers and acquisitions"

With the downturn in the cycle and the cooling of financing expectations, mergers and acquisitions (M&A) have started to regain industry attention.

Whenever the industry is in a downturn, it is always the most active time for the M&A market. Because only at this time can large companies buy some high-quality assets at a cheaper price, and some small companies with certain technological and product accumulations, facing survival and development issues, are willing to sell off to avoid the fate of bankruptcy and closure.

The impact of M&A is obvious. It can eliminate the false and retain the true, allowing companies that truly adhere to long-term value and break through core technologies with high barriers to become stronger. It can also enhance competitiveness in an era where the Matthew effect is increasingly prominent.

For small companies, being acquired also avoids the situation of bankruptcy and closure. Through cooperation with large factories, the resources accumulated by the company in the early stage can play a further role in the future.

Li Zhanmeng, the founding partner of Chipai Capital, said in an interview with the author: "In the next two years, China's semiconductor industry will definitely undergo industry reshuffling. A considerable part of the companies in the market that lack competitiveness will break the capital chain due to financing difficulties and lack of self-sustaining ability, leading to industry clearance, and mergers and reorganizations between enterprises will also become the norm."

From the perspective of industrial development, the current Chinese semiconductor industry is too fragmented. It is difficult to become a leading enterprise with only a single product. Advancing towards a "platform-type" and comprehensive manufacturer through mergers and integration, and forming international competitiveness, is also a natural choice.

Zhu Jing, the deputy secretary-general of the Beijing Semiconductor Industry Association, once pointed out that the domestic chip design M&A integration will be more concentrated in fields such as analog chips, RF front-end, MCU, display driver IC, EDA, and IP. These fields have several characteristics: first, there are many existing startups; second, there are many listed companies with a gap advantage; third, price wars and internal strife are very serious; fourth, they were once hot fields for capital investment, and capital has pressure to promote integration; fifth, the valuation level is relatively reasonable, providing the premise for M&A negotiations."Although M&A will heat up, we cannot be blindly optimistic," Li Zhanmeng emphasized, because the domestic market for listed company M&A is not fully market-oriented at present. The management still tends to use traditional valuation methods to constrain listed companies. In addition, the approval process and cycle are very lengthy, leading to many transactions that are difficult to truly land due to valuation or approval issues.

Maintain Patience

The bankruptcy reorganization and dissolution of chip companies is an important warning for the domestic semiconductor industry.

The exit of these companies not only reflects the intensification of competition in the semiconductor industry but also indirectly reflects that, although the Chinese semiconductor industry has made progress in some aspects, there are still deficiencies in independent innovation, corporate culture construction, market competitiveness, and sustainable development strategies. Faced with such an industry situation, entrepreneurs and investors must adopt more cautious and forward-looking strategies. Although the future road is full of challenges, it also contains infinite opportunities.

Bu Rixin, General Manager of Chuangdao Consulting, said to the semiconductor industry observer that semiconductor entrepreneurship is a matter that requires a long time of technical reserves and experience accumulation. It requires a deep industry background and resources, and is definitely not a "campaign-style" entrepreneurship. It is not about piecing together a star team in a short time and getting huge financing to ensure successful entrepreneurship. The team's model, the company's strategy, product research and development, market landing, etc., any problem in every link is fatal to semiconductor entrepreneurship.

In addition, some companies, although backed by the industry, can play a linkage role and seem to have a clear logic, but it is also necessary to consider whether the industry's shareholders can independently support the volume of a chip. If the volume does not rise, the business model is difficult to establish. In the chip field, the industrial chain needs to have division of labor, and the approach of taking on everything downstream is not necessarily feasible.

Under the current conditions of fierce domestic and international competition, and unfavorable market and investment environment, if domestic startups want to break through a bloody path, Zhong Lin talked about the following points to pay attention to:

Genetics are very important for a chip company. The person in charge must truly understand the chip in order to make every decision well.

It's easy to start, but the road is hard to go. Making chips is a relatively long process, and the thinking of short, flat, and fast is not suitable for making chips.

Making chips, the first is direction, the second is the technical team, the third is funding. The more high-end and complex the chip, the greater the investment, the longer the research and development iteration time, and the greater the risk. If the shipment of a chip does not reach a certain scale, without a certain profit, it is impossible to recover the cost. It is not a success just to make a chip.Transforming Mindset, Focusing on Profitability

Whether the domestic chip startup competition and reshuffling can be completed originates from investors and will inevitably end with investors.

As semiconductor IPOs become increasingly tight and difficult, early-stage investments are hard to exit, and equity transfers cannot find a buyer, some chip investors have started to become anxious.

The anxiety of chip investors is a nightmare for chip entrepreneurs.

Zhong Lin said that the repurchase peak set by the IPO time limit will come in the next two to three years, and due to the current tightening of the secondary market IPO, a large number of projects will trigger repurchase. Investment institutions usually choose to repurchase projects with poor revenue and no blood-making ability. Therefore, these companies usually do not have the funds to repurchase the shares of the investing shareholders, and if the founder signs a repurchase clause with the value of the held shares as the upper limit, triggering the repurchase means triggering liquidation, and the entrepreneurial project will basically be terminated.

Facing market changes, domestic chip companies need to transform their mindset and pay more attention to profitability. There is an essential difference between financing mindset and profitability mindset. The former is inclined to rapid financing and listing, while the latter focuses on technological advantages, efficiency improvement, and profit maximization. Choosing which mindset will depend on the company's own situation, industry environment, and the timing of the capital market.

Under the current situation, domestic chip companies need to re-examine their strategy and no longer regard financing and listing as the only sign of success. Achieving profitability and enhancing technology and product competitiveness will be the key to getting out of the trap. As the domestic and international markets continue to evolve, a profitability mindset may become the best choice for domestic chip companies before 2026.

This is also the answer Zhong Lin gave when facing the way out for domestic chip startups. He said that all domestic chip startups must aim for listing or self-profitability, and make product performance and cost competitiveness among the top in the country. Without this premise, listing or mergers and acquisitions are unrealistic. However, it is not enough to have good technology and products to list; customer barriers and supply chain barriers must be considered. Otherwise, even if the technology and product performance are the same as others, there is no opportunity, because once the market pattern is formed, it is difficult to break the barriers of major customers. If it can fill the domestic gap, there is still an opportunity.

In the current era, with the development of technological innovation and application, many product scenarios have opened up, which may be opportunities or traps. Whether to choose the right one and seize the opportunity is both luck and fate.

However, it needs to be emphasized that before looking for a blue ocean track, startup chip companies must first ensure that their technology is solid enough, and secondly, they must ensure that the startup team can continue to create value. Perhaps 5-10 years ago, as long as the company had a slight technological advantage, it could gain the favor of capital, but now it is very difficult to get a ticket to "swim" in the blue ocean area.In summary, the future of the domestic chip industry is full of challenges, but only by responding in a more rational way can a path out of the trap be found.

Written in conclusion:

From 2018 to 2022, with the support of multiple factors such as policy, market, and capital, the domestic chip industry has ushered in a vibrant entrepreneurial environment, and a group of leading chip manufacturers with certain appeal and influence in various sub-tracks have emerged.

However, now almost every sub-track is already very crowded. After experiencing a relatively thorough baptism in the capital market, the tens of thousands of chip companies that went bankrupt in 2023 may only be the beginning. In the next few years, more companies may disappear in the long river of history due to reasons such as cyclical fluctuations, operational strategy errors, and backward technology and products.

The survival of the fittest in the semiconductor industry will enter an accelerated period.

Under this background, whether it is a startup or an industry giant, if you want to go through the cycle and achieve long-term development, in addition to having excellent technology, products, and services, you also need to have accurate predictions and grasp of profitability and cycle nodes. Perhaps only in this way can companies avoid the fate of being eliminated in the impact of the downturn cycle and the cold winter of capital.