Switzerland-listed wireless semiconductor company U-Blox’s acquisition of Cognovo, a UK-based technology company spun out from chip designer ARM, for $16.5m shows the strengths and weaknesses of corporate venturing in a declining venture capital landscape.
While a powerful corporation can create viable technologies and support them in expectation of future financialand strategic benefits, there is often also an imperative to bring in partners.
Outside a handful of hot areas – this year enterprise data analytics, last year social media – venture capital firmsrarely tread, especially if the market size is comparatively small or involves technological or other risks.
This is the bind that apparently affected Cognovo. A source close to the deal said ARM, which declined to comment, was unable to find other venture capital (VC) partners ready to help create a company and decided not to be the only funding source.
The source added: “This is another example of the UK VC community being unable to recognise good technology and this company was acquired by a foreign entity at a discount to the true value of the technology, the company and the opportunity.”
Thomas Seiler, chief executive (CEO) of U-Blox, said: “This new foundation [buying Cognovo for its software defined modem (SDM) chip] broadens our serviceable market and will increase our margins in the automotive, consumer and industrial sectors. Our first 4G [fourth generation] product is planned for 2013.”
Gordon Aspin, Cognovo CEO, added: “With more than 300 man-years of research and development invested in our SDM technology, this acquisition brings together the industry’s most advanced software modem development platform with some of the best integrated circuit design and global navigation satellite system engineers in the world.”
ARM had found itself with intellectual property in baseband chips – those managing functions that require an antenna – after an acquisition in 2002, but this did not fitits core technology.
In a case study of Cognovo by Global Corporate Venturing in March last year, Bruce Beckloff, vice-president of corporate business development at ARM, said: “ARM faced a classic dilemma in corporate development. We focus on general-purpose microprocessors, and dedi-cated baseband technology requires dedicated engineers and marketing that does not fitthe core business easily. However, baseband applications are extremely important to ARM so we want to know how our core technology would intersect with areas of changing technology.”
To square the circle, ARM’s research and development team worked on soft modems for three years from 2005 to 2008 before a decision had to be taken whether to move the unit to one of the group’s fiveproduct divisions, wind up the effort or consider a spin-out using the management team from TTP Communications bought by Motorola in 2006 for more than $100m.
As executive chairman Tony Milbourn said last year: “Corporate investors can see the strategic advantages and return on investment from Cognovo having £100m in turnover by 2020 for £25m investment. The issue with corporate venturing is it usually needs others to set the round terms, which takes us back to financial investors.”
Beckloff said last year: “Cognovo was difficult for financial VCs to invest in as the time to revenue and early investment in this industry is significant. Cognovo was only established in 2009 and first revenues are modest in 2010-11 until significant revenues start in 2013-14.
“Start-ups in the semiconductor industry are not very appealing to VCs currently, which is why Smoothstone – now named Calxeda – in which ARM also invested with several other financal VCs, was the first appreciable series A investment for a fabless [non-fabricating] semiconductor company for almost two years.
“But this absence of money coming in and fewer start-ups means returns will increase as demand for strategically important acquisitions by larger companies remains constant.”