What Will Propel India's Semiconductor Startups — Industry Veteran Ganapathy Subramaniam Reveals

In the backdrop of Computex 2024, I had an insightful chat with a seasoned investor focused on listed Asian semiconductor companies.

He shared his insights on the investment sentiment in the Indian semiconductor startup space compared to software startups.

The discussion centered on what would accelerate venture capital (VC) funding for semiconductor startups in India. Key points mentioned were:

Grand exits of software startups have lowered the threshold, making more people willing to take risks in the software space.

Indian VCs are comfortable with information technology (IT) startups due to innovations in business processes, which are easier to grasp. Semiconductors, on the other hand, require deep technical know-how or a particular education background.

However, excluding the initial expertise, business evaluation is similar. More success stories will help lower barriers for capital infusion.

During this conversation, he mentioned one rare person who fits this bill of having reached the semiconductor peak — Ganapathy Subramaniam (Gani).

I asked for Gani’s time, and he was very kind and agreed to unwind.

A veteran of the semiconductor industry, Gani shared his perspectives on the opportunities and challenges facing Indian semiconductor startups. As a successful entrepreneur and now a venture capitalist, Gani's insights offer a unique vantage point.

His success with Cosmic Circuits is considered the '83 World Cup moment for Indian semiconductor startups. Ever since, he has had his ear to the ground when it comes to the Indian semiconductor industry.

In a candid conversation, Gani provided a temperature check on the state of the Indian semiconductor industry and offered his recommendations to accelerate its growth. Edited excerpts:

How is the Indian semiconductor industry doing?

Considering that India began global design contributions in 1986 with the arrival of Texas Instruments, which is about 40 years of experience and accumulated know-how contributing to leading global chip design products in various capacities, we house one-fifth of the world’s chip design talent.

But if we look at collective exits of semiconductor product design startups (including even the IP licensing companies), (it) is only half a billion USD (United States dollar) altogether.

Now, contrast that to Israel, which has a fraction of our talent. It has amassed close to $50 billion USD in semiconductor startup exits (a back-of-the-envelope calculation). The bottom line, India is punching well below its weight in the semiconductor (or deep tech) product space.

> Key takeaway: talent abundant, startup deficit

While India boasts a significant share of global chip design talent, the collective exits of semiconductor product design startups in the country have been relatively modest, at just half a billion dollars, compared to Israel's $50 billion.

What, according to you, could be the primary reasons for this lackluster semiconductor balance sheet?

Even at the risk of being controversial, I think one of the main reasons is, the semiconductor product design MNCs (multinational corporations; for example, Nvidia, Intel, Qualcomm, TI) pay top dollar to Indian engineering talent.

Indian engineers earn almost a US-level pay in India (that is, say 75 per cent that of a Texas engineer, excluding the Californian valley). This relatively comfortable option inhibits them to go out into the rough waters of startups.

The second is the dearth of risk capital with deep pockets to understand and support semiconductor startups in India. It may exist in pockets, but it is insignificant in comparison to other geographies.

The third crucial aspect is the lack of business and market knowledge. This is partly because of MNCs, where individuals are focused on perfecting one aspect of engineering execution. But any successful venture needs, apart from deep technical know-how, a go-to market strategy.

Without this market acumen, the aspiring individuals coming out of these MNCs will end up invariably creating a technology services company. But product companies only having the knowledge of a processor, amplifier, ADC is not enough; one also needs market and business intuition.

> Key takeaway: the comfort of corporate careers, the risk of startups

The high salaries offered by multinational semiconductor companies in India often deter engineers from taking the entrepreneurial plunge, as they prefer the stability of corporate careers over the uncertainties of startups.

How is the Indian startup ecosystem different from other geographies?

The Indian semiconductor startup ecosystem is evolving to be a hybrid of the Israel and China models.

Can you please elaborate how you characterise the two models?

The Israel model is to use local talent to build products for the globe and compete with the best to get a global market share because there is no local market.

This is similar to what the likes of I (as CEO of Cosmic Circuits), Cirel Systems, Aura Semiconductors did. All our revenue came from outside of India.

The other is the China model, where the Chinese equipment manufacturers primarily catering to the local market nurtured local semiconductor fabless companies to build chips for them. That is how Hisilicon and others started; a few have graduated and become global companies.

So, India will not only continue to build on the Israeli model, but soon some of the startups will also capitalise on the burgeoning local demand. After championing and perfecting in the local market first, they will go on to also compete globally. Therefore, India will evolve into a hybrid of the Israel and China models.

> Key takeaway: a hybrid model based on Israel and China

Gani envisions the Indian semiconductor startup ecosystem evolving into a hybrid of the Israel and China models. While the Israeli approach focuses on building globally competitive products, the Chinese model nurtures local demand-driven startups that later expand internationally.

Now, please put on your VC hat and elucidate what are the three things you look at when approached by a semiconductor fabless chip startup?

This is very straightforward. First comes the quality of the team. I try to assess if the team has had any entrepreneurial appetite; even being in a large MNC, if they went the extra mile in their previous jobs to understand the end application beyond the scope of executing a mere task, assessed the market potential, and eventually contributed to building a world-class product.

Second is the total addressable market (TAM): if a startup is addressing a local market, I will try to assess if their solution is much better than the market offering, and (since) the Indian market is dominated by the MNCs, the innovation quotient they bring to the table will be a crucial factor.

And, focusing on the fabless startup, the third factor I will look for is the experience of a good number of tape-outs.

> Key takeaway: venture capital priorities

When evaluating semiconductor startups, Gani prioritises the quality of the founding team, the total addressable market, and the startup's experience in chip design and tape-outs.

Switching gears, if you had a hotline to the decision-makers in the government, what would you recommend to accelerate the semiconductor sector?

The government has recognised the importance of this sector through the fab initiative, DLI (design-linked incentive), PLI (production-linked incentive), and Chips to Startup (C2S) (schemes). This has given the initial thrust, creating a huge momentum for semiconductors in India, and this buzz and marketing of the sector by the government helps VCs without a deep-tech background to also join the bandwagon.

Although the fab is important for strategic reasons, the Indian government should also maniacally pursue the building of many fabless companies, out of which a few will go on to become unicorns.

Increase the DLI+C2S capital allotment to the same order as the fab incentive, if not more. Focus on what can help a fabless startup get to the market quickly, procure locally, and foster champions. A few success examples will create a multiplying factor.

> Key takeaway: government support and catalysts

Gani commends the Indian government's initiatives, which have provided a crucial boost to the semiconductor sector. However, he suggests further increasing the funding allocation for fabless startups to match or exceed the support for semiconductor fabs.

Great! Let's end with your new venture fund — Yali Capital. Can you give us a quick pitch?

Sure. I will be the founding and managing partner of Yali Capital. Yali Capital is a SEBI-approved Category 2 AIF (alternative investment fund). Its target is close to Rs 500 crore, with an additional Rs 310 crore as a greenshoe option.

Yali Capital will also have a dedicated GIFT City vehicle to provide seamless participation for foreign investors. Yali will focus on India as its geography and deep tech as its compass.

Chip design will be the primary focus area, with robotics, smart manufacturing, genomics, aerospace, and AI (artificial intelligence) as other focus areas.

Thanks, Gani, for providing your valuable insights! 

Gani, through Yali Capital, is addressing the crucial risk capital gap that plagues the Indian semiconductor industry from making a greater impact. Let us hope more pieces fall in place to accelerate the Indian footprint in this crucial semiconductor industry.

By addressing the talent retention challenge, fostering market-oriented expertise, and with a more conducive government support, India can unlock the full potential of its semiconductor ecosystem and emerge as a global player in this crucial industry.