The secret to successful innovation is persistently challenging the status quo. The Santa Clara Valley of California, an area that is well known globally as Silicon Valley, was born out of the same innovative spirit. As an area plush with fruit orchards, Silicon Valley had a bucolic setting until the 1900s. Technologists set sight on the region and started innovating. Shockley Semiconductor arrived and transformed Silicon Valley's profile by establishing a research facility in the area. Something similar is happening in India.  

Five years ago, semiconductors and chip manufacturing were absent from India. While companies understood the significance of chipsets in the electronics supply chain, the absence of local chip-making facilities was an impediment to innovation. Today, conducive policy measures have led to global chipmakers like Micron constructing facilities in our country.  

At Matrix Partners India, we have spent a lot of time studying the chip market in the country and identifying prospective investment opportunities.  

Matrix Partners, as a global entity, has been a big believer in semiconductors and hardware. We’ve been early investors in SanDisk and Xilinx and also in Apple and Oculus. Matrix Partners China applied a similar investment theme around four years ago. Now‌ it is India’s time to enter this arena.  

Building chip-by-chip  

Before we look at the ongoing R&D in India’s semiconductor space, it is essential to get an overview of the technology.  

For the non expert, the fundamental building block of a semiconductor is ‌ a transistor. Think of it as a switch or amplifier, which performs a logic function when it interacts with other transistors. When you take more of these transistors, it becomes an integrated circuit that carries out certain functions. And when you take billions of these transistors and put them on a wafer made of silicon, it becomes a chip that can do numerous complex computations.  
 
India’s semiconductor moment

There are different parts to the semiconductor supply chain. The chip is designed in the US, manufactured in Taiwan using European machinery, and packaged in South Korea or China. From there, it goes on to a company such as Foxconn that assembles the electronics and inserts the chip into the device.  

India was missing from this equation, but the pandemic changed the landscape. China went under a prolonged lockdown, leaving the world with a chip shortage. Countries, including India, realised the necessity of adopting self-reliance in chip manufacturing.  

The Indian government developed a two-pronged approach:  

• Design-linked incentives to reward individuals who design chips.
• Production-linked incentives to boost chip production in India.
  

Automobiles, electric vehicles, and consumer electronics, electronics manufacturing services, original design manufacturing became some of the priority areas for semiconductor chips. Simultaneously, senior talent and design teams started moving from the US to India.  

This also signals a clear opportunity for fabless design startups in India to design for global use cases. It means that the startup designs and sells the chip hardware while the actual production is outsourced to another manufacturer.

With talent becoming more specialised over the years, global companies can hire manpower at a lower cost compared to their US counterparts. Taking a leaf out of software-as-a-service firms that do product development and testing in India before going international, companies can follow the same model and reduce their go-to-market time.  

Emergence of end markets

Secondary research shows that India’s semiconductor market is currently $20 billion. The market size is expected to increase to ~$70 billion over the next five to seven years.

Local manufacturing solves supply chain challenges. However, sales is a challenge that is still unsolved. Currently, India has not had an end customer buying customised chips for their products and services. The proliferation of EVs, however, brought a breakthrough. But even for EV chip components, India has largely been dependent on supply from global majors such as Nvidia and AMD. New technology and hardware have led to higher consumption, and point towards that situation finally changing.  

There has been an evolution thanks to the rise of 5G in telecom and defence. Additionally, semiconductors are a core component of smart consumer electronics such as refrigerators and air conditioners, which have become popular over the past few years.

In addition to the surge in demand, India also benefited from favourable geopolitical tailwinds, a huge focus on becoming self reliant in semiconductor production, and a deep talent pool. We believe these factors together give India the right to win in the global semiconductor market.  

End of Moore’s Law

Gordon Moore, the co-founder of Intel, made an observation that the number of transistors on a microchip doubles every two years, while the cost halves. So with time, the chips have become smaller but come with higher computing capability.

There is a rising belief in the semiconductor industry that Moore’s Law has played out, and the chips of the future will be more expensive and unaffordable.  

We believe the trend line that we’ll start seeing because of this is the rise of custom chips. It will be cheaper and more efficient compared to general-purpose chips. We are already seeing signs of this. Hyperscalers are the best examples. Amazon has Graviton, Google has Tensor Processing Units (TPUs), and Meta is working on its own MTIA chip. Tesla is dabbling in its own custom chips, and there is also its supercomputer Dojo.  

The other exciting trend line is that of RISC-V. It is an open-source instruction set architecture (ISA) used to develop custom processors.  

It is great news for startups because of two reasons:  
1. It’s open source and royalty-free, unlike the high fees required to be paid to ARM.
2. Startups can customise the architecture for their own needs.  

In terms of hardware, the ISA of RISC-V is already developed to a point that is comparable to existing processors. Its software ecosystem still has some way to go, so it may not yet be the best choice for developing cloud-based solutions.  

That said, it is already gaining popularity in the startup world.  

The AI opportunity for silicon  

The buzz around artificial intelligence has taken the world by storm, and semiconductor companies have been the biggest beneficiaries because they enable the underlying models to train in natural language. Nvidia, as of now, is the best combination of hardware and software to train, with Intel and AMD also catching up.  

The high cost of the chips and constrained supply make it a restrictive business choice, but there may be an opportunity to create more chips of similar quality at lower price points.  

The final word for founders

We’re on the cusp of a big revolution in the semiconductor industry in India.  

As an investor, if there was a broad semiconductor playbook for founders, it would look something like this:

1. Take a particular industry use case.  
2. Build an application-specific standard product (ASSP) that is specific to that industry but can be used across multiple different companies.
3. Once you deliver that, work towards building an order revenue book of about $10 million, and then look at further fundraises.
4. Take your business to the world.

The moment for India’s semiconductor dream is undoubtedly now. We are super bullish on the semiconductor space in India and we want to invest.  
If you are building applications and design solutions in the semiconductor space for India, feel free to reach out to sudipto@matrixpartners.in. Let us chat.

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