The DAC Valuation

The Design Automation Conference is approaching fast, and the evidence of a funding gap is in plain sight. An entire day of the technical conference has been dropped. This is disheartening to say the least, and in the long term it may be a very costly mistake.

The problems started when the Internet bubble burst in 2000. Until then, DAC was growing to the point whereby few convention halls were large enough. It became so large that you almost needed an internal transportation system to get between meetings, browse the show floor, or attend conference sessions. It was a real workout. DAC filled both Moscone North and South, as well as the underground passageway that connects them. EDA products were all timed to be ready for DAC, and large numbers of engineers were sent to see what might be useful.

Today, DAC easily fits into Moscone West and even that is very underutilized. This thinning out started with travel cuts, which meant that companies were not sending as many engineers to see the latest technology. Each company only sent a few, and they had very defined goals. EDA companies needed less suite space. At the same time, EDA companies were becoming a lot more secretive about their new products, sharing details only with their chosen few. Product release schedules became a lot more widespread.

Wanting more control of customer interactions, EDA companies started their own private trade shows. Some even took them on the road, offering regional events to minimize the user travel expenses. The reasons to appear at DAC shrunk, and large EDA companies started to question the costs and the value they received in return. They argued that they were now subsidizing the startup companies, which were the only ones benefiting from DAC.

Cost of sales is about 25% of total costs for a typical large EDA company. This has been significantly trimmed over the past couple of decades. It still might be considered high, given that a vast majority of those sales come from just a small number of companies. EDA companies know who the potential customers are. They know who makes the purchase decisions, and they know a lot about the products they are working on. Yet it still costs so much to make a sale.

Now consider the case for a startup. They do not have, nor can they afford, a global sales force. It often has been said this is the primary reason there are only ever three major EDA companies. Startups are also at a disadvantage in that they are, by definition, selling something new and different, and that is harder to sell. It may be disruptive in terms of their flow or methodology, potentially adding risk to a development. Most teams are also under extreme time pressure, meaning they will only consider changing something if there is no other option open to them. Large EDA companies help them with those transitions.

The easy part of a startup is coming up with a great product. The hard part is selling it. Many sell one copy for evaluation purposes, and even if that is successful, they might struggle to provide the level of support necessary for the company to risk putting it into a production flow, no matter how much it may help.

Back to DAC, which is one of the primary ways that new technology becomes visible. This applies both to the academic level and startups. The EDA ecosystem relies on a steady stream of new ideas, but it is taking longer for startups to penetrate the market, and that means total costs to a successful exit are increasing. In turn, that means VCs are less inclined to provide funding. Without the funding, fewer of the interesting research ideas will even become startups. In turn, that could result in fewer people conducting research in EDA. The potential end result is that all innovation has to be done within the large EDA companies. Some EDA companies used to have internal VC groups, but they’re all gone today. A few have a scattered approach when it comes to university and research funding, but that is only in support of existing tools and flows.

It is a negative spiral. In the end, many good technologies will be lost because a startup couldn’t overcome the entry barriers. Those that do manage to show success will become a lot more expensive to buy, because they have invested a lot more to get there, and the VCs want a decent return. Large EDA companies are the ultimate buyers of startups. We have seen a few startups acquired by end-user companies recently, and that is an encouraging sign, but I doubt if that is enough to end the decline.

Not all the blame can be put on the large EDA companies. They are public corporations, and their top priority is to their shareholders. They have an attention span of the next quarter, the year, and potentially a couple of years out. They do not care about the distant future. They just expect that management will make the right decisions to keep them growing.

If the industry wants a vibrant ecosystem with a flow of new ideas and technologies, the barriers to startup success must be brought down. DAC is one of the primary ways to make this happen. If EDA companies are not willing to make the investment, they have to be prepared to pay more for startups as a result. They are, in effect, transferring cost of sales expenses and investment in DAC to engineering acquisition expenses.

I do not believe that the industry will remain healthy if only three companies control the creativity of the industry. We need new ideas being generated in the universities, effective ways to prove the ideas at scale through startups, potentially disruptive technologies that forge new approaches to solving problems. Perhaps AI will create a big enough disruption that a new ecosystem will form.

What do you think? How valuable is DAC as part of the ecosystem or are there better ways to help nurture new ideas?