This part completes our look at what I call the "three-legged financial stool" topics of the critical success factors for MEMS commercialization. Profitability and venture capital (VC) attraction along with the creation of wealth, make up this concept.
2013 Grade= C+, 2012 Grade= C, Change= +1 , S.D.= 1.8 (based on 85 respondent inputs), S.D. =1.0 (based on grades from 1998 to 2013)
Fig. 1: MEMS profitability grades have closely followed the levels of major financial indices, i.e., S&P 500, DJIA, and the NASDAQ, reaching its D+ low in 2008 and climbing to C+ in 2013.
Profitability, as well as creation of wealth and VC attraction, continue to plague successful MEMS Commercialization efforts. It is quite difficult to have a sustainable MEMS component business. Case in point, SiTime, which was recently sold for $200 Million to MegaChips, was able to achieve annual sales in 2014 of approximately $100 Million, yet continued to be unprofitable after nine years in business selling MEMS resonator chips. MEMSIC, a consumer accelerometer and 3D compass supplier that went public in 2007, continues to be unprofitable. Cepheid, a successful IPO 2001, is still unprofitable.
The consensus amongst the interviewees is that it is quite difficult to create a profitable MEMS device company. It is well known that the recent price erosion of inertial sensors and other MEMS components for cellular phones is painful for device suppliers. Automotive first tier suppliers were known to be the toughest customers in the past expecting suppliers to sign up to a mandatory 5% per year price reduction. This pales in comparison to the rigors of playing in today's commodity consumer sector.
The consensus of opinion is that one needs to move into higher value added products that are truly unique to beat the profitability death cycle associated with commodity products. The following table is a guideline for MEMS profitability using gross profit margin (GPM) percent criteria by application sector:
|SECTOR:||GROSS PROFIT MARGIN for packaged & tested MEMS components:|
However, there are exceptions to these values. Steve Nasiri, founder of Invensense, was able to create GPMs in the order of 55% at the time of his IPO in November 2011. However their GPMs are now in the low 40% range. Steve stated that the key to maintaining such a high level of profitability for the MEMS gyro product line was an exceptionally high yield of greater than 95% in addition to high-volume/low-cost packaging and testing strategies, and lean staffing.
Please note that it is extremely difficult to obtain GPM figures on private companies and there are only several MEMS companies that are public. MEMSIC, a public company, was only able to achieve low-to-mid 30% GPMs in its primarily consumer accelerometer and 3-D compass/magnetometer business before it decided to go private. Analog Devices (ADI) exited the consumer market after a brief entry into the Nintendo Wii with its accelerometer product. ADI, primarily a semiconductor company, targets GPMs in the 55% region, even though it's a major player in automotive sensors with its airbag accelerometer and gyro for vehicle stability. However, it took them 12 years to achieve profitability with their airbag accelerometer product line.
Though not a pure-play MEMS but more a broad-based sensor company, Measurement Specialties (MSI) is only able to achieve a mid 30% GPM. It is interesting to note that MSI primarily supports the automotive and industrial sensors applications and achieves a much lower GPM in its auto product line.
- Profitability will come with more fortune 500 companies involved.
- Profitability is good but declining as volume in Asia pushes margins into the basement. The prediction is that, once Asian suppliers get their act together, it will slowly push out higher cost suppliers like ST and Bosch.
- If you are in the right market segment, you can absolutely profit.
- Cell phone business is a race to the bottom in pricing. MEMS will never get good grades on profitability here.
- Margins are extremely low for many products and economies of scale do not always help.
- Major marketplace continues to have dramatic yearly price erosion.
- MEMS has been very profitable for some with this continually improving.
- This remains a tough area for most players, and it is one of the reasons why venture capitalists are not interested in investing.
- Many companies, including some longstanding ones, are finding it increasingly difficult to be profitable.
- Profitability has shifted away from component companies and into systems companies.
- Again, it's a high-volume device problem. With autos and cell phones being strong users, both of these industries are notorious for low-price purchases.
Profitability in MEMS is elusive. Even after many years, the majority of MEMS companies are not profitable and to be profitable it is critical that you:
- Have highly differentiable products…not "me to" or commodities…and this can be very difficult in large volume consumer applications e.g. mobile phones
- Add value vis-à-vis integration of functionalities and proprietary software
- Run a tight ship and lean payroll… drive for high yields…greater than 95%...and in summary to quote Andrew Carnegie…"watch your costs and the rest will follow", however, high GPMs are difficult to sustain
- Create market share leadership
- Fully understand the development process to create products and to be realistic in your schedules…MEMS are not easy…the MEMS design- turn process is long and you need several of them
- Pick your market segments judiciously
VENTURE CAPITAL (VC) ATTRACTION
2013 Grade=D+, 2012 Grade=D+, Change=0, S.D. =1.5 (based on 85 respondent inputs), S.D. =2.38 (based on grades from 1998 to 2013)
Fig. 2: MEMS venture capital attraction has consistently garnered the lowest grade of all 14 Report Card critical success factors. It consistently is in the D range. Its large standard deviation of 2.38 highly reflects the major popular securities averages, i.e., S&P 500, DJIA, and the NASDAQ, over the reporting period.
VC funding continues to be elusive for MEMS companies and for many reasons. "The continuing trend in VC funding moved away from hardware companies many years ago and is now firmly entrenched in the social media area. This is much more extreme in the US than in Europe" states serial entrepreneur Job Elders PhD, "The US has the same language for all social media and the same culture, in Europe we have many languages and cultures. Additionally, countries like the Netherlands and Germany have a long history in mechanatronics, it is part of the culture."
Kurt Petersen PhD is a member of the famous Band of Angels. These are Silicon Valley entrepreneurs that form a group of angel investors and also partner with other investor groups. Kurt states, "We typically fund 10 to 15 ideas per year, review 15 new deals per month, and thus provide the necessary first investments that are next to impossible to achieve other than with the proverbial friends-and-family investors. We are a truly viable alternative to major VC firms. Additionally, we invest a great deal of our time mentoring our companies."
Another viable funding strategy is from a strategic partner. For example, Schlumberger was the strategic partner for NovaSensor over 25 years ago when NovaSensor had some unique oil-and-gas pressure sensing technology. As recently as late 2014, Alps made a second investment in Qualtre for their gyros. And the stories of strategic investment and buyouts continues throughout the MEMS community.
- MEMS is not the only victim here as VC money for anything hardware related has decreased. However, due to low success rates, high capital requirements, and long timelines, new VC money going to MEMS companies seems to be almost non-existent.
- Poor record of results, historically. VCs are off betting on internet/software plays.
- The industry has shown some ability to attract venture capital, but startups getting funding appear incredibly naive. And this drives venture capitalists away in the future.
- Almost no interest from VCs on anything hardware related. Only corporate venture funds have shown recent interest.
- Angels and companies such as Invensense are picking up the slack.
- Medical and bio apps seem to be attracting more interest.
- Venture capitalists are still scared but their minds are opening to the potential as high volume opportunities are arising.
Attracting investments from venture capitalists for MEMS companies is not easy to accomplish. Several MEMS companies continue to have follow-up investments from earlier stage investors. Hardware companies, which include most MEMS companies, are finding it more difficult to attract VC investments since product development is resource intense and the development cycles are long. A viable alternative is investment from strategic partners who can leverage your technology.
How do you get funding for a MEMS company?
Create a defensible business plan that objectively defines the addressable market and an execution plan that can realistically achieve it. Have a strong and credible management team. Have your intellectual property in place. Demonstrate a great value proposition and significant product differentiation. Have a well-defined exit strategy.
In two weeks, the next part will address R&D and employment.
About the Author
Roger H. Grace is president of Roger Grace Associates (Naples, FL) which he founded in 1982 as a marketing consultancy serving the sensor, MEMS, IC and capital equipment markets. He holds the B.S.E.E. and M.S.E.E. (as a Raytheon Company Fellow) degrees from Northeastern University where he was awarded the Engineering Alumni of the Year Award in 2004. He was a visiting lecturer at the University of California at Berkeley College of Engineering from 1990 to 2004. He can be contacted via email at [email protected].
Read the first five parts of Roger's MEMS marketing manifesto.