Sondrel looks to long-term pursuit of custom silicon

You can’t time the markets. Listing in October always looks risky but less so for one design specialist compared to waiting.

October is not an auspicious month for stock markets. Thirty-five years ago, Black Monday put the brakes on what had been up to then a display of irrational exuberance for which the markets are notorious for good reason. And October was already famous for sudden drops to the point that stockbrokers are somewhat superstitious about the month. It might not seem the ideal time for an initial public offering (IPO) but for a company like Sondrel, a specialist in electronics design, waiting for the supposedly ideal time is probably a bad idea.

For the past year, the chip market has been riding high as companies who now rely on electronics to underpin their designs found that getting hold of key products got a lot harder in the wake of the Covid pandemic. Such demand-driven shortages in semiconductors, however, are transitory. This one took a lot of people by surprise because the great financial crisis of 2008 put a dampener on the business for a lot longer than usual, suppressing the conventional boom-and-bust cycles.

Now, indicators are pointing to a rapid downturn, the depths of which depend on how worldwide economies fare, before a likely recovery perhaps some way into 2024. Design, however, has always been somewhat counter-cyclical because chipmakers have, as Malcolm Penn, president of market-analyst firm Future Horizons, puts it, “designed their way out of recession”. Though they may have trouble selling the existing chips to the point where they might be better off just recycling the materials, the next wave was typically driven by products that use newer, more cost-effective process technologies. Now there are more secular reasons for looking at design as moving separately to the product supply chain.

At the Design Automation Conference in July, Charles Shi, senior analyst at investment bank Needham & Company, provided some comfort to the executives of the electronic design automation (EDA) software companies and designers there.

“If you put things into a lot of the tech companies or some of the so-called unicorns, you’re going to lose a ton of money. But if you put money in Synopsys, Cadence, you’ll be fine. EDA is part of the more secular, long-sustained growth of the semiconductor industry,” Shi claimed.

The thinking behind this is that, historically, if you had the cash to continue developing chips, you would by default design for whichever process node was likely to come onstream in a recovery because this would offer better performance and lower cost than sticking with an older design, particularly if you could displace a competitor that sold companion functions you wind up integrating. Those days look to be past for the moment and, maybe, permanently. The growing difference in wafer-processing costs between successive nodes means smaller transistors are not necessarily cheaper. For systems companies, it has changed the arithmetic they used to decide whether to have chips made for them specifically as application-specific integrated circuits (ASICs) versus buying off-the-shelf. 

“We’ve got more and more people switching to ASICs from standard products to get better economies and better price/performance tradeoffs,” says Graham Curren, founder and CEO of Sondrel. “People don’t want to spend money on transistors that they are not using. Now they have lost the cost benefits associated with shrinking technology they need to find other ways of getting more out of silicon to make it more efficient.”

If more of those systems companies want their own chips, they need to get them designed and, not just that, have an outsourced provider act as a product supplier that organises shipments from the foundry and packaging plant to their factories. Because do you really want to set up your own, complicated supply chain for what may be a single part, albeit an important one in an end system? Enter the fabless-ASIC supplier: companies such as AIchip, Global Unichip, Faraday Technology, Socionext and Sondrel.

Curren believes Sondrel has a further advantage in this sector against some of the larger players: geopolitics. “Two of the larger competitors are very exposed to US trade sanctions on China,” Curren says. “It’s hard to know how it will play out but restrictions are changing on a weekly basis.”

Those restrictions will make it harder for companies with large design teams in mainland China to support designs commissioned by western companies. Sondrel itself set up a China design centre several years ago but “only a small part of our revenue is from China”, Curren says. “From a technology access perspective we need to watch what we do carefully but with competitors being heavily invested in China, that creates an opportunity for us.

“If you put those things together, we really don’t want to wait a year to do this. We haven’t raised money before: the company has been self-funded. But we have got to the point where we can see a far greater opportunity than we can realistically generate cash internally to meet in the short term,” he adds. “We are seeing such a strong demand in the market right now that without an additional boost to the cash we would be constrained. So that’s why we decided that if we should raise cash, now is the time.”

Another option for obtaining money to grow the fabless-ASIC business, particularly in this industry, would be private equity, but Sondrel management decided the public option looks a better bet. “We like the opportunities we can get with being public. And Socionext itself had a very successful IPO. This puts us on a more equal footing with them so we thought for lots of different reasons a public offering was better than private equity.”

The IPO itself takes place on Friday 21 October on the Alternative Investment Market. The company opted for that rather than the larger London Stock Exchange (LSE) on the basis that it tends to attract longer-term investors than the more trade-heavy LSE, Curren says. However, financing is only part of the picture. “There is a vast range of challenges for how to grow a tech company that are much broader than financing,” Curren says, and they are likely to have a bigger impact than the short-term vagaries of the stock markets.

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