Sondrel eyes long-term pursuit of custom silicon

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You cannot time the markets. Listing in October still seems risky, but less so for a design specialist compared to expectation.

October is not a good month for the stock markets. Thirty-five years ago, Black Monday put a damper on what was until then just a display of irrational exuberance whose markets are known for good reason. And October was already famous for its sudden declines to the point that stockbrokers are somewhat superstitious about the month. It might not seem like the perfect time for an initial public offering (IPO) but for a company like electronics design specialist Sondrel, waiting for the supposedly perfect time is probably a bad idea.

Over the past year, the chip market has exploded as companies that now rely on electronics to support their designs have found that securing key products has become much more difficult following the Covid pandemic. These demand-driven semiconductor shortages, however, are transitory. This one took many people by surprise as the Great Financial Crisis of 2008 dampened activity for much longer than usual, removing the classic boom and bust cycles.

Today, indicators point to a rapid slowdown, the extent of which depends on the state of global economies, before a likely recovery possibly through 2024. The design, however, has always been somewhat countercyclical as manufacturers of chips have, as Malcolm Penn, president of market analytics firm Future Horizons, puts it, “designed to ride out of the recession.” While they may struggle to sell existing chips to the point where it might be better to just recycle the materials, the next wave was generally driven by products that use newer, more cost-effective process technologies. Now, there are more secular reasons to view design as an integral part of the product supply chain.

At the Design Automation Conference in July, Charles Shi, principal analyst at investment bank Needham & Company, reassured executives of electronic design automation (EDA) software companies and designers .

“If you put stuff in a lot of tech companies or some of the so-called unicorns, you’re going to lose a ton of money. But if you put money in Synopsys, Cadence, you’ll be fine. EDA is part of of the more secular and sustainable growth of the semiconductor industry,” Shi said.

The idea behind this is that historically if you had the money to keep developing chips, you would design by default for any process node that might go live in a recovery, because that would offer better performance and lower cost than sticking with an old one. design, especially if you could supplant a competitor who was selling add-on features that you ended up integrating. Those days seem to have passed for now and, perhaps, permanently. The increasing difference in wafer processing costs between successive nodes means that smaller transistors are not necessarily cheaper. For system companies, it changed the arithmetic they used to decide whether to have chips manufactured specifically for them as application-specific integrated circuits (ASICs) versus buying off the shelf.

“We have more and more people switching to ASICs from off-the-shelf products to get better savings and better price/performance trade-offs,” says Graham Curren, founder and CEO of Sondrel. “People don’t want to spend money on transistors they don’t use. Now they’ve lost the financial benefits associated with downsizing technology that they need to find other ways to get more out of silicon to make it more efficient.

If more of these system companies want their own chips, they need to have them designed and, not only that, have an outside vendor act as the product supplier who arranges shipments from the foundry and packaging plant to their factories. Because do you really want to set up your own complicated supply chain for what may be a single, albeit important part in a final system? Enter the fabless-ASIC provider: companies such as AIchip, Global Unichip, Faraday Technology, Socionext, and Sondrel.

Curren thinks Sondrel has another advantage in this sector over some of the bigger players: geopolitics. “Two of the biggest competitors are very exposed to US trade sanctions against China,” Curren said. “It’s unclear how this will pan out, but the restrictions change every week.”

These restrictions will make it harder for companies with large design teams in mainland China to support designs commissioned by Western companies. Sondrel itself established a design center in China several years ago, but “only a small portion of our revenue comes from China,” Curren says. “From a technology access perspective, we have to watch what we do carefully, but with competitors heavily invested in China, it creates an opportunity for us.

“If you put these things together, we really don’t want to wait a year to do it. We have never raised funds before: the company is self-funded. But we’ve gotten to the point where we can see a much bigger opportunity than we can realistically generate cash internally to meet in the near term,” he adds. “We are seeing such strong demand in the market right now that without a further increase in cash, we would be constrained. That is why we decided that if we were going to raise funds, now is the time.”

Another option for getting money to grow the fabless-ASIC business, particularly in this sector, would be private equity, but Sondrel management decided the public option seemed like a better bet. “We love the opportunities we can get from being public. And Socionext itself had a very successful IPO. This puts us on a par with them, so we thought, for many different reasons, that a public offering was preferable to private equity.

The actual IPO takes place on Friday, October 21 on the Alternative Investment Market. The company opted for this over the larger London Stock Exchange (LSE) on the basis that it tends to attract longer-term investors than the more commercial LSE, Curren says. However, funding is only part of the picture. “There are a wide range of challenges to building a tech business that go well beyond funding,” Curren says, and they are likely to have a bigger impact than the short-term vagaries of stock markets.

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