VCs are not likely to pull the plug anytime soon. We expect VC investments in semiconductors to remain high beyond 2020–2021 for four main reasons:
High demand for new chips, chip designs, and architectures. New kinds of chips for high-performance computing and machine learning, the main type of artificial intelligence, are attracting investment because of strong end-market demand.5 Companies that make specialized chips for other growing markets, such as privacy-enhancing technologies, automotive applications, and cryptomining, are also seeing demand rise.6 The capabilities that these applications need demand fundamental changes at the hardware level that can’t be addressed by the software layer alone.
High valuations. Overall tech valuations have skyrocketed, especially for semiconductor companies. Since 2016, the S&P 500 is up 121%, the NASDAQ is up 198%, and the Philadelphia Semiconductor Index is up 418%. And tech behemoths and even SPACs are starting to eye silicon, giving VCs additional exit options.
Increased government investment.Governments worldwide are directing substantial investments toward the semiconductor industry.The United States has allocated US$52 billion for investment in the semiconductor industry as part of the CHIPS for America Act.7 The European Union has set a goal of doubling its share of global chipmaking to 20% by 2030 and has introduced its own Chips Act.8 Billions of dollars of EU government money will flow to fabless chip startups directly or via VC funds. And China has created a US$50 billion fund of its own for investing in domestic semiconductor companies.9 The country is hoping to boost chip production capacity and expand indigenous fabrication capabilities, in part to avoid US technology embargoes. (That said, China has been trying to grow its domestic chip business for years—and has been struggling, in part due to China lacking access to cutting-edge critical manufacturing technologies.)10
Growing fab capacity and expansion plans for capital and R&D.The chip industry is massively increasing its fabricating capacity. Twenty-nine new fabs have started or will start construction in 2021 and 2022: eight in each of China and Taiwan; six in the Americas; three in Europe, the Middle East, and Africa; and a pair each in Japan and South Korea.11 As a result, global manufacturing capacity is expected to grow by 36% from 2020 to the end of 2022, from 22 million 200 mm-equivalent wspm (wafer starts per month—a measure of aggregate global chipmaking capacity) to 30 million wspm.12 Existing chip companies will use some of this capacity, but the startups that VCs are funding will also use a fair amount.
In more detail, which kinds of new chips, and therefore which industries and customers, are likely to receive most of the VC money and drive innovation? As mentioned in the companion prediction on RISC-V, we see lots of growth and investment in the RISC-V architecture, but many other areas are attracting investment too. AI and machine learning (especially edge AI), data center and high-performance computing, 5G, and Internet of Things chips all seem poised to show above-industry growth rates for years to come. In general, foundries are also looking to enhance their chip development environments to promote faster, easier chip development for startups and other smaller players.
Pretty much everyone should care about increased VC investment in semiconductors. At a high level, more VC deals equal more money, which in turn equal more new kinds of innovative chips. Innovations in chips power innovations in computing capabilities—and we all want and need the things that those innovations drive. Think of VC investments in semiconductors as a garden: They are planting more seeds and fertilizing them better. It will be fascinating to see what grows!