Rumor has it that investments in EDA are picking up these days. The corollary rumor says there are numerous new start-ups that will be debuting at DAC in several weeks. So, let’s visit those rumors and find out what’s cooking.

First, we’ve got some comments from Mike Schuh, General Partner at Foundation Capital in Menlo Park, CA. Schuh’s an EDA veteran, both as a player in the industry (Schuh was CEO, co-founder, and chairman of the board of Intrinsa, a software company acquired by Microsoft, and vice president of sales at Clarify, Cadence Design Systems, and Computervision.) and as an investor. He sits currently on the board of directors of CoWare, Jasper Design Automation and Barcelona Design. Mike’s an articulate observer of the EDA industry, and I was happy to have a chance to talk to him about angel investors, institutional investors, and how those groups play in and around the EDA industry.

Following Mike’s comments, and dovetailing with his observations, are some sound bytes from 3 new executives in EDA (although "new" is a relative term):

CEO Ellis Smith, and team, at Blue Pearl Software

CEO Joe Tanous at Stelar Tools

Hamdi El-Sissi, newly named CEO at Aptix Corp.

Blue Pearl Software and Stelar Tools are quintessential EDA start-ups; both just announced on Monday, May 24th. Aptix, on the other hand, is hardly a new player in the industry, but is aggressively trying to move past its recent troubles.

El-Sissi takes over the reigns at Aptix at a most difficult time in the company’s history; the former CEO is currently in jail awaiting arraignment on various charges and the company has just declared bankruptcy. Under the circumstances, El-Sissi’s comments are also quite interesting and help to characterize the eternal optimism that’s one of the fundamental attributes of companies in this small, but feisty industry.

All three companies are certainly residing on radar screens in the EDA investment community of Angels & Others. I spoke with El-Sissi on Monday, the 24th and spoke with Smith and Tanous in back-to-back phone calls on Tuesday, the 25th. My phone call with Mike Schuh was Thursday morning, May 27th.

Schuh: "Well, typically, angel investors are not institutional. Venture capital investors are institutional investors. We do this as a profession and [we’re in the business] of investing other people’s money. Angel investors act on their own behalf and most typically are found investing at the earliest possible stages of a company."

Schuh: "Angel investors often invest in ideas and smart people alone. Institutional investors on the other hand look more to when there’s already a product or a customer [associated with] a start-up. So, it could be for instance that the entrepreneur finds it’s easier to raise small amounts of money from angel investors to use to build their first products, and even to sell to their first couple of customers. Then, they might turn to institutional investors [to go forward]."

"There have been times when institutional investors are willing to bypass this phase and participate in the early stages of a company. However, we don’t usually feel that we’re passing up on hot opportunities [by not participating at this stage.]"

"It’s not that venture capital investors won’t make early stages investments, it’s just not as predictable. At Foundation Capital, we like the angel investor process. We like angels in that they are also often individuals who are interested in devoting a considerable amount of time and energy to the new venture they’re investing in. The entrepreneurs then get the benefits of both the initial money and some significant business expertise as well. By the time a project like that comes to us here at Foundation Capital, it’s far easier for us to figure out if we want to invest."

Schuh: "It’s actually always a good time to make early stage EDA investments. There have always been very smart people in EDA who are solving real problems. What’s interesting about today, in particular however, is the change at the process level. The move from 90 nanometers to 65 nanometers means that there’s a significantly different set of problems, which is translating into new opportunities for investment."

Schuh: "Well, as an entrepreneur, I would look for venture investors involved in companies who are solving similar problems to the one that I’m tackling, and then I’d approach those investors with my ideas. If the entrepreneur knows someone who can provide an introduction to one of those venture capital firms, that’s even better because often we look so much more favorably on business opportunities that come to us from people that we know and trust - much more so than from people we’ve never met."

"I would add that the start-up experience in EDA is very Darwinian. Those entrepreneurs who figure out how to get the attention of the best institutional investors are the ones who wind up building the companies that succeed."

Schuh: "No, that’s not the case. It’s true that there are always obstacles, but smart entrepreneurs can always find somebody who knows somebody. It’s either that, or they’re just persistent enough to get a meeting with the institutional investors."

Schuh: "I’d say that it varies from venture capital firm to venture capital firm, but I would say in our case we do in fact tend to favor firms [who reside] locally."

Schuh: "I don’t see anybody fleeing the area. Recruiting employees to your EDA company has [always been an important part of the process.] The highly qualified talent pool continues to exist here in Silicon Valley as it does no where else on the planet."

Schuh: "In general, I think there will be plenty of opportunities for successful companies to be built and for venture capital investors to make money. The shame of it is, EDA continues to be an under-valued business and by that I mean, it’s the fuel that drives the engine of the world’s economy. Yet, in total, it’s only a $4 billion or $5 billion revenue business upon which $100 billion in revenue is built up from all of the [subsequent industries] that rely on EDA."

Schuh: "I don’t really know the answer to that question. Certainly it will take leadership from those companies who most impact the industry - companies like Synopsys, Cadence, Magma, and Mentor Graphics."

Schuh: "Well, that list has changed. Magma really has [enjoyed] courageous leadership who have built an interesting and sustainable business. But, [irrespective of which companies are the leaders in EDA], the industry is going to need some out-of-the-box thinking from the leadership of the largest companies."

"For example, the business model that is currently in place in EDA is one of the things that constrains revenue opportunities in the industry. [Everybody talks about] climbing to higher levels of abstraction, pursuing system-level design, but it’s how that technology will be packages, markets, and sold that will have the greatest impact on the revenue and outlook for the industry."

Schuh: "I would tell angel investors that it takes a special expertise to invest in EDA. The technology can look very arcane [to the uninitiated] and if you don’t have some grounding in the technology, [I would proceed with caution]. But given that an investor has the right experience to understand the industry, I most certainly would tell angels to invest. You’ve got the best and brightest minds from places like U.C. Berkeley and Stanford coming into the industry with a never-ending stream of great ideas. There’s no other industry like it."

Smith: "We launched Blue Pearl in 2004, but we started working together on the project towards the end of last year. [The process began] with discussions about the very interesting technology that Prab and his guys had developed. Blue Pearl was the result of those discussions. What we’re doing is developing tools to automate the process of RTL closure, a very critical area in design."

"The current method of RTL closure is a risky manual process, which involves people looking at functional verification to determine if the design is correct, as well as timing and DFT solutions. In the area of timing closure, we’re looking at a couple of things including the ability to determine if paths are false or not - something that’s very important for fitting an FPGA design into a smaller design. Our tools are also [applicable] to structured ASICs; all 3 of our tools can be used in that environment. Of course, the tools are all applicable to ASICs as well. Overall, we believe our technology will help collapse the number of iterations involved in design closure."

"Currently, there are a couple of small companies working in the area of RTL closure, but they’re using structural techniques that have grown out of rule checking. We’re not positioning ourselves against any of those companies. We’ve taking what a couple of small companies have done and moving the technology a few steps further."

Varma: "The development has been funded through technology partnerships and through product sales. The Blue Pearl environment is based on state-space exploration and symbolic simulation technology that we developed at Veritable, but Blue Pearl owns the technology."

Smith: "Veritable was a company that was founded by Prab Varma; the company had products in various areas. We didn’t stay under the Veritable name because when I came on board we decided to form a new company, the one that became Blue Pearl. With this company we’re moving forward to develop products that Veritable didn’t have. Blue Pearl isn’t Veritable. The technology still lives, but Veritable is not the company [hosting it]."

"After serving as CEO of CrossCheck Technology and TransEDA - which we took public in London - and working all over the globe, I had recently been looking for a company or technology in Silicon Valley. I was also looking for someone I felt to be one of the most senior and outstanding technologists in the world. That was definitely Prab Varma. His company, Veritable, had some really good, fundamental technology that I’d never seen before - technology that was both proprietary and innovate. Because Prab and I have worked together in the past and because I could see that his engineering and software team are as good as any I’d ever seen, I decided to become involved in the effort."

"I feet this is a tremendous opportunity to automate the process of RTL closure and the feedback we’re getting from various companies says we’re definitely hitting the nail on the head. I believe this technology addresses a market where there’s a lot of pain. We’ve named the company ‘Blue Pearl’ because blue pearls are both unique and valuable. We believe our tools are both unique and valuable as well."

"To date, we’ve been self funded, but also have had funding by way of private investors in Asia and the U.S. What is our exit strategy? When I went to Exemplar Logic, I was hired to take the company public and ended up merging with Mentor Graphics. I was hired by TransEDA to sell them, but we ended up going public instead. In building a company, you develop products that provide strong value to your customers, and then you build the company to provide value to your employees and investors as well. As long as you continue to grow the value for all of those players, you’re not at a point where you have to decide which exist strategy to pursue."

Hallett: "It’s the technology as well as the team that’s come together to really make this happen. We’ve all know each other and have had both individual successes and successes together. We’re working together because we’re certain we can continue to give a lot back to the industry through our efforts We know what to expect from each other and we’re just rolling up our sleeves, working hard, and having a lot of fun!"

Tanous: "Steve Sapiro [Vice President of Marketing] and Larry Carner [CTO] were both involved in Eagle Design Systems, which was bought by Synopsys. Larry was then at Synopsys, exercising their tools doing large HDL design. Synopsys did a downsizing, and Larry left the firm and got together with Steve. He said that while he was exercising the tools at Synopsys, he saw deficiencies in the tool flow. So he decided with Steve to put together a prototype and they took it around to customers in the industry that they both knew. That’s how they got feedback, and started working in conjunction with a local seed-funding group."

"One of the partners at Northwest Tech Ventures [a Stelar investor] is Gordon Hoffman, who was a founder of Eagle Design Systems. Gordon and I worked together back at Mentor Graphics. I had a company that had merged with Mentor and Gordon had merged with Mentor, as well. So, we were together briefly at Mentor before I left and started OrCAD. Gordon then left and started Eagle Design Systems. We’ve kept in touch since that time and done some investing together as angel investors."

"In the case of Stelar Tools, Gordon helped mentor Steve and Larry on their effort and after they had wrung out the prototype and received positive customer feedback, they called me in to do due diligence to come up with seed money."

"I gave them my initial impressions of building a company out of two guys with some technology, and I gave them some opinions about pricing, packaging, and distribution. Then I got interested in the company myself and said I’d participate in the seed round.

We’re actually residing in an incubator space here in Portland with SmartForest Ventures. We’re all in the same building and I’ve done some work for them as well. Actually, it’s a very incestuous beginning [with a laugh]."

"In fact, you could say that it’s ‘old school’ EDA connections that got this thing put together. The folks at Capybara Ventures and SmartForest also have long ties to EDA. Although one thing that’s very different with us is our initial funding for the company. We’re what I call a ‘tweener’ - we’re between seed funding and a regular venture round."

"The constraint in a venture round is always the arithmetic. We don’t yet have sales, just beta, but we’ve had a lot more than just a regular angel seed round of funding. Rather than do a $250,00 round, we did a $1 million dollar round with 3 venture groups and some of the founders. Then we put together a complete management and engineering group at this phase. It’s not really your typical thing when several guys put together a management team and then do their round of funding."

"We’ve all got lots of EDA credentials. Although, I’ve got to admit that for a period of time I had promised my wife I’d never do anther start-up. Besides, I felt that everything that could be done in EDA was already done. But a lot of EDA companies have had that same mentality."

"All of a sudden, we’re seeing a whole new bunch of entrepreneurial activity in EDA. The guys here at Stelar Tools are just one facet of this whole new entrepreneurial thing that’s popping up in the industry. And it’s something that we plan to take advantage of in developing our toolset. I had a really good experience at OrCAD in doing M&As, and buying technology where we didn’t have the expertise. We expect to do the same here.

"I’m very excited about the technology here and the business opportunity. I’ve been very active in the last 5 or 6years investing in other venture funded businesses. Since I started this, people have been calling me to see if there’s any synergy there."

"We’ve got a huge value proposition here, and it’s not just one specific technology; it can be used all the way through the design process. Eventually we’ll start getting customer feedback as they discover how this thing is going to impact their designs."

"What’s our exit strategy? Well, I’ve done two IPOs, but others have been acquisition plays. Certainly and IPO is an option and we’ve discussed it with our investors, but for now my goal is to build a company, not just a technology. I know that if you build from that perspective, the company will have an even higher valuation even if it does get acquired [rather than going public]."

"We have a plan and a market strategy with other tools to be added to the plan. When you only have a technology, you’re just trying to sell that technology [in any exit strategy]. But when companies go out looking to acquire technology, they’re also looking to buy something at the corporate level as well. They’re looking to acquire a strategic direction and a corporate vision. Our strategy is to take input from our customers and help designers see the impact of our tools, all the way through from design to manufacturing. If we can do that effectively, there will be true, long-term value in the company."

"I like to say it’s like a bullet. You can make a bullet, but eventually you need to put it in a gun. The technology is the bullet, but there’s a whole lot of other elements that go into building the gun. The company’s the gun."

"By the way, I’m bringing management skills to the effort, not technical expertise [With another laugh], if I was just cutting code here, it would be a complete disaster. Everybody knows that!"

El-Sissi: "The best philosophy is to never look back. We’re moving forward as a company, and the reality is that the Aptix team has a huge breadth of experience - from semiconductor technology to design methodology, investment management, and marketing and sales. The company has a lot of good ideas, excellent employees, and great brand-name customers. I’m here to help patch things together within the company and to see that, going forward, we do things in a somewhat tighter fashion with better planning and execution."

"I’m also here to reassure our employees about the future of the company. Many working here really believe in this company and look at their efforts as making an investment in Aptix. They believe in the products, the technology, and the vision. And, importantly, they’re hanging on. Additionally, we have a lot of customers who have been extremely supportive, giving us new orders and what have you."

"I want this company to be a player, to be successful, and to have a very successful exit strategy. And I believe we have the investments in place to get that job done. Could I see taking the company public? Well, that certainly would be a nice thing to do, but it would require a heck of a lot of work."

"After the bubble of the dot.com era burst, these days you really need to be a very, very solid company to think about going public. You need strong products, strong markets, and strong earnings to [meet those requirements]. Certainly, however, I’m looking to make this company very attractive as an acquisition target or as a merger partner. I’m actually investing in the company."

"I believe we’ve got great technology, but we’ve fallen on hard times because of recent events. I like to say that we know where we’ve been and now we’re making a clean break with the past. The bottom line is that we are totally focused on the future and that’s how we’ve moving forward. Although the company is 15 years old, you could actually look at Aptix as a start-up right now. Then you could ask, ‘How many start-ups have this many brand-name customers at the very outset?’"

"I bring some balance to my role at Aptix as I come from the user side of things. Also, I was responsible for developing tools during my time at Northern Telecom, and I’ve also done semiconductor things. That is why I feel I bring the proper balance to my situation here at Aptix. At the end of the day, however, it’s the judgment calls that will determine the success or faliure of things. A leader needs to evaluate people’s performances and decide what’s best for a company."

"It’s true that in the life of a company, things do change over time. When you’re a young start-up, people look at the founders and the CEO to see there’s a strong team there, and to see if there’s a technical guru [at the heart of the effort]. As a company matures, however, the issues are more about correct management than about having [a guru on board]. I hope to bring respect for both the technology and the management here at Aptx. Again, I believe it’s all a matter of balance."

"Why did I take on this job at this somewhat difficult time in the company? Well, my wife has always had tremendous intuition and I’ve always trusted her intuition; she’s been invariably right over and over again about things. My wife told me that she was sure that things are going to work out here at Aptix. She told me to just go ahead and take the job. ‘Just do it,’ she said."

"I said, ‘Yes, Ma’am,’ and here I am."

*************

May 28, 2004

Peggy Aycinena owns and operates EDA Confidential. She can be reached at peggy@aycinena.com

Copyright (c) 2004, Peggy Aycinena. All rights reserved.