Building Europe’s Next Billion Dollar Businesses: Icera’s Story

British fabless chip company Icera’s story  contains important lessons for companies wishing to become global giants. Europe has deep strengths in hard core technology. And now it has a new generation of managers that have already been through the experience once of building companies in Europe and have no need to cash out early. It has investors ready to step up and fund great entrepreneurs with great technologies. But it is a long haul for Europe’s billion dollar babies and all the more so for capital-intensive semiconductor businesses.

The conventional wisdom is that it is next to impossible to build a European-based billion-dollar tech company with staying power. Try telling that to Stan Boland. The British engineer, now 50, created a top European chip company, element 14, a startup fabless semiconductor business specializing in high-density DSL chipsets that he sold to the US’ Broadcom for S642 million  in 2000.

Boland walked away from that sale with a substantial financial windfall. But after a brief stint at Broadcom and a short summer vacation on the Riviera in 2001, he was confident that he could build a new European semiconductor company that would stay in Europe and become a global giant. So, he and several partners launched Icera, a British fabless semiconductor company that set out to make communications engines inside smart phones that are intrinsically cheaper to develop and sell. Never mind that it meant taking on chip industry behemoth Qualcomm.

Eight years, one acquisition and $240 million in venture capital later, Boland is still optimistic but far more sober. Icera was named a World Economic Forum Technology Pioneer in 2006.  Its technology is inside mobile devices sold by big companies like China’s ZTE and Huawei, Canada’s Sierra Wireless, Finland’s Nokia and S. Korea’s Samsung to over 40 operators worldwide, including the biggest in the US and Europe such as AT&T and Vodafone.

But Icera is dwarfed by the industry leader. It grew its revenue fivefold last year and expects to double it again in 2010. Even so, its smallest competitor is still around ten times larger. And scaling using venture capital is fraught with difficulties.

Boland, Icera’s CEO, says he is confident that his investors will make a good return but it is not quite the industry it looked like 10 years ago. “The amount of challenge and difficulty that we have gone through to develop it the point where it is now has been much tougher than I could possibly have imagined,” he says. “Our need to respond to the industry consolidation and transfer of knowhow from product manufacturers to their chip vendors is a real challenge.” That is not all. “On top of that, the commercial pressure is brutal out there – our major competitor takes no prisoners,” says Boland.

Icera contains important lessons for companies wishing to become global giants. Europe has deep strengths in hard core technology. And now it has a new generation of managers that have already been through the experience once of building companies in Europe and have no need to cash out early. It has investors ready to step up and fund great entrepreneurs with great technologies. But it is a long haul for Europe’s billion dollar babies and all the more so for capital- intensive businesses like semiconductors.  Growing up is painful. Winning is not obvious. And successful exits – even in less capital-intensive sectors like Internet and software – can take 10 years, if not more.

“I think we have stretched the limits of venture capital and it’s not yet clear if that is enough,” says Boland. The company raised its latest round of $45 million in May this year and all existing preferred shareholders, including Amadeus Capital Partners, Accel Partners, Atlas Venture, Balderton Capital and DFJ Esprit participated in the funding round.

As a step beyond normal venture capital, Icera recently arranged to refinance its venture debt through Silicon Valley Bank. This also allows it to access new working capital lines to help close the gap between the time silicon wafers need to be ordered and paid for and the arrival of payments from large customers for end products.

The pressure to keep up with R&D spending of the bigger players in a consolidating world is putting additional strain on the company.  And, moves by Qualcomm to bundle some of its technologies together makes it tougher to compete against them without Icera broadening its scope even further, prompting Icera to ponder whether it should ultimately go public as a “mobile modem” company (it makes the baseband processor core and radio chips for mobile phones) or whether it can generate more business by integrating with an applications processor vendor to compete with Qualcomm.

The path forward is not clear.  With its recent financing, the company has no need to do anything quickly and has no plans to go public in the immediate future.

Boland says he is convinced the problem would be the same if the company were based in the U.S. or Asia. But it is arguably more problematic in Europe for investors to wait so long for returns at a time when limited partners are questioning whether it is worth continuing to invest in European venture funds.

It is not surprising that European Internet plays are more attractive to VCs, since they can put less money and know after two or three years whether a start-up is going to have a successful exit.  With chip companies “you have to wait such a long time to know if it works or not and that it is almost beyond venture funds with their intrinsic 10 year lives,” Boland says. “The industry is searching for a way that they can be financed through the business cycle.”

Boland believes that new actors, such as sovereign wealth funds or late stage funds, may need to step in to allow young, innovative chip companies to go the distance.

“We have not lost our original vision,” says Boland. “We have had an amazing set of successes and we have a hugely competitive offer and a strong presence in a product line that is generating revenue and value growth but looking beyond this, it would be right to question how to further build the company so that we can in fact compete with globally-integrated firms like Qualcomm with almost unlimited resources. Watch this space!”

 

This story appeared in a print publication Informilo produced in partnership with Raconteur Media, which was distributed at Le Web in Paris December 8 and 9. The print publication is a beta version of a quarterly  on innovation, entrepreneurship and venture capital that Informilo and Raconteur Media plan to produce in the Times in 2011.

 

 

 

 

 

 

 

 

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