High-tech

Due Diligence: Siroyan

"Today, with over $20M in the bank, we can forge ahead building the softcore products that will catalyse the emergent system-on-chip (SoC) revolution." So said Ken Will, founder and CEO of Siroyan, in June 2000, on closing its second funding round. So what progress appears to have been made with that $20m?

The Chilli takes a closer look at Siroyan as a representative of Europe's current generation of privately held high-tech outfits. With the private equity market licking its wounds and the semiconductor industry experiencing a severe downturn, there are lessons that would-be entrepreneurs in the IP (intellectual property) sector might want to take note of.

Background

Founded in 1996, Siroyan's first incarnation was as a representative for EDA tools and intellectual property (IP) vendors. From 1999 onwards the company concentrated on developing its own proprietary semiconductor IP, OneDSP, with the aim of becoming the leading supplier of IP for digital signal processing (DSP). The company currently has three offices: Reading and Bristol in the UK, San Jose in the USA. Investors include Tudor Investments & nCoTec Ventures.

Siroyan's executive team includes several respected technical leads, including a cto, a chief architect and three engineering vice-presidents. One key organisational area that needs addressed before a start-up's second funding round is the sales & marketing infrastructure. Dave Hutton, formerly of defunct Irish IP start-up Silaria, recently came in as sales vp, following the departure of Siroyan's first marketing manager.

Siroyan's OneDSP technology is based on a very long instruction word (VLIW) approach, similar to that used by TriMedia, Equator and others. Siroyan's twist is to allow for processor cores to be arranged in clusters, providing scalable performance, reminiscent of clustering minicomputers such as the DEC VAX in the 1970s. Several patents have been granted to help create a defensible advantage and add significantly to the company's valuation.

The OneDSP technology has a proprietary instruction set, and therefore required investment in brand new development tools. The porting of application software (middleware) developed by partners - a key component in providing solutions - must also be funded. This must be paid for either by the partner, a customer or by Siroyan themselves. To make the number of ports (and cost) manageable, this must be done around a focused marketing strategy.

It is fair to say that the higher-performance the product, the less of the embedded market it can address. This could be due to the price of the product - both in terms of the acquisition cost (license and royalty) and also its usage cost (time & cost to integrate it into the customers design, the impact on design targets such as power consumption, etc). Embedded processors that address mid-range applications tend to have the highest volume, allowing a stable royalty stream - essential for an IP business.

Siroyan has stated that they play in the market where RISC meets DSP - this is pretty broad, encompassing wired/wireless communications & digital consumer applications. Various semiconductor markets are dominated by specific processor architectures, with a large investment in software - creating de-facto standards in specific markets. The most dominant instruction sets in the embedded processor market include ARM, MIPS & SuperH.

In the markets targeted by Siroyan, semiconductor IP incumbents include ARM & DSP Group, with newcomer SuperH Inc, spun out of Hitachi & ST Microelectronics. These are three well-backed organisations with significant customer engagements and software support. Many customers prefer to adopt application-specific standard products, which do not require any license fee. Incumbents here include Analog Devices, Cirrus Logic, Hitachi, Texas Instruments, and many others.

Looking strictly at the DSP IP market, the main competitive threat to Siroyan is the DSP Group (DSPG), currently merging with Parthus to create ParthusCeva. According to Gartner Dataquest, DSPG currently holds 70% of the DSP core licensing revenue. Their latest product, CedarDSP, has adopted some of Siroyan's OneDSP concepts such as clustering. It is not compatible with any of DSPG's previous products, and requires, like OneDSP, investment in new development tools and middleware.

However, this is more than offset by DSPG's market share, customer relationships, brand name and reputation, giving Siroyan a tough competitor. It would be prudent for a start-up in this position to adopt some guerrilla tactics; picking a niche that has remained unnoticed by DSPG in order to gain traction with both potential customers and partners. Siroyan's partner programme, OneWorld (shades of British Airways here?), thus far lacks the kind of application-focused partner that would form a vital part of any such strategy.

Siroyan does not appear to have publicly announced any licensees. Two years after raising their second round, this could be construed as an ominous sign, and must place further pressure on the executive team.

Conclusion

Two years on from getting second round funding, Siroyan needs customer traction. With VCs under great pressure from their limited partners to return funds, Siroyan may have to survive with existing finance - which means reducing the burn rate is vital. This must also go in hand with a clearly articulated, focused strategy. The company should not try to be all things to all people. Pick a market niche away from the glare of DSPG, develop an irresistible solution using OneDSP and partner middleware, and go for it - that's what the money is for.

Talking about the 'SoC' (system-on-chip) revolution is good stuff to say to potential investors. However, in a downturn, customers are less willing to proceed with new projects. They are unwilling to start custom chip projects and pay large NRE (non-recurring engineering costs) fees. Customers are not willing to take a building block and use it if a) it does not provide a complete solution and b) forces them to change how they do things, incurring costs.

Perhaps Siroyan has a key customer; perhaps they have a guerrilla market strategy. But what is clear is that after $20M and two years, the company needs to clearly articulate a way forward.

What can an entrepreneur learn from this?

• Getting your first customer is your top priority from day one; further funding could depend on it (check your term sheet)
• People will only pay for solutions. IP companies must learn to sell products that solve problems; generic IP is of little value and is essentially a commodity
• Ensure that your product is adequately supported by third parties; you may need them to gain entry to a specific market
• Ensure that the segment of the market targeted by your product is large enough to support business for three or four vendors
• Patents are important; Siroyan has value in its patent portfolio, and some of this has been realised in the first implementation of their technology
• Articulate a clear strategy that is consistent through the press, potential customers and investors
• Expand cautiously; in lean times like these, cash burn must be minimised to allow an organisation more time to secure the licensing deal that will help close a funding round successfully
• Under pressure from their limited partners, VCs have to focus on managing their existing portfolio and this could entail merging or winding-up portfolio companies; get those customer engagements!

Comments on this story? Send and e-mail to our staff analyst, Woz Ahmed: woz@thechilli.com

© Chilli Publishing Ltd 2003

20SEPT2002