EE197S

Technical
Entrepreneurship Seminar

Technical Economics

June 11th, 2004

Scott Perry – VP of Finance

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 Agenda

• Product cost analysis and modeling

• NRE analysis and modeling

• Cash flow modeling

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 Product Cost Analysis – COT

Case #1 - Full or partial COT with Company controlling the fab:

• Fab – who will manufacture

– Wafer cost

– Die size

– Yield assumptions – there is yield loss all the way from

the fab, to the assembly house, to final packaging and
shipping
• Die size
• Defect densities
• Components of design (memories more susceptible to yield
loss)

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 Modeling Analysis – Effect of Yield
ABC Semiconductor Company, Inc.
Analysis of effect of yield on pricing

Data Set Set A Set B Set C Set D Set E Set F

Wafer pricing $ 2,500.00 $ 2,500.00 $ 2,500.00 $ 3,000.00 $ 3,000.00 $ 3,000.00

Gross die per wafer 3,000 3,000 3,000 3,000 3,000 3,000
(assumes 4.0 mm x 4.0 mm chip)

Yield 50% 75% 90% 50% 75% 90%

Cost per raw unpackaged

and untested die $ 1.67 $ 1.11 $ 0.93 $ 2.00 $ 1.33 $ 1.11

Yield is directly impacted by die size and defect density.

Defect densities generally follow an exponential decay model similar to that shown below:

Defect Densities Over Time

0.35
0.3
Defect densities

0.25
0.2
0.15
0.1
0.05
0
2 3 4 5 6 7 8 9 10
Quarter after process went into production (time)

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 Product Cost Analysis – Key Ingredients COT

Case #1 continued

• Assembly and Test – who will test the raw dice for
functionality and package the good parts?
– Test cost
– Assembly cost

• Royalties – will you pay anyone for technology used?

• Shipping and insurance

• Qualification costs post shipment

• Inventory handling costs

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 Product Cost Analysis – Structured ASICs

Case #2 - Structured ASIC model:

Basic costs:
• Negotiated price for fully tested, packaged units
• Pay up front fee for development and access to the process
• Inventory handling costs

Significant considerations:

• Pay significantly higher per packaged part cost

• Generally only appropriate for low volume parts (size and
complexity of design also a consideration)
• Provide quality data as a part of price

• Yield risk not a consideration, except it will be factored into

the price you pay
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 Modeling Considerations for Product Costs

• Break down into component costs for easier analysis

(die, packaging, shipping, etc.)

• Consider yield loss at each significant step of

manufacturing when determining overall yield

• Largest levers on cost in order of importance: wafer

cost, die size, maturity of flow of manufacturer (i.e.
defect densities)

• Build in room for your die size to grow past initial

expectations

• Understand how factory loading will impact wafer

pricing

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 Common Mistakes in Modeling Product Cost

• Guessing at a cost without doing any detailed calculations

• Estimating a die size that is unrealistic

• Overly optimistic yield expectations

• Not expecting yield loss at each step of manufacturing

• Newer process – person “estimating” cost unfamiliar with issues

NOTE:

• This is an area that a significant number of VCs understand – not doing your
homework here will show.
• You will likely be asked about expected die size, yield, process and
manufacturer early on.

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 NRE Analysis and Modeling
Considerations – A Background

NRE is often considered a nebulous black hole

Most investors do not fully understand the costs
involved with building chips
Metrics are difficult to use as NRE is sensitive to:

• Type of device (functionality required)

• Time to market (make vs. buy and technology risk)
• Technology used (0.25 vs. 0.13 µm)

These sensitivities can cause wide variations in

the cost of NRE during a project

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Common Types of NRE to Consider in Modeling

Developed technology – often a make vs. buy consideration

Examples:
Processing cores (MIPS, etc.)
PLL/DLL
Standard cells
Memories

Thought: Generally better to buy and reduce time to market and

technology or implementation risks.

KEYS: having the right employees to integrate – better off with a

“been there, done that” person if you buy. Purchased IP often has
trade-offs related to die size and performance.

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 NRE to Consider in Modeling - Continued

Outsourcing – buy vs. hire

Test program development
Firmware development

KEY: having the right person monitoring the outsourcing

General development costs

Emulation – will you emulate? What platform?

Packaging – will you use a standard package or will you need
a special package/process?

Costs associated with taping out:

Mask sets - fixed cost but dependent on number of layers
and process technology
Engineering lots – the wafers don’t come with the 1st mask
set

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 NRE to Consider in Modeling - Continued

Preparing to have parts – hard costs involved with testing your

packaged parts

Probe cards – to interface with tester

Bring up boards – internal bring up and debug – design
complexity dependent
Load boards – tester related
Burn-in boards – QA related

Receipt of parts – costs involved with ensuring the parts are in a

saleable condition

Tester time – variable cost; design dependent – can cost

$0.05 or $2.00 to test a part
QA testing – often outsourced – dependent on quality level
you will be required to supply

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 Modeling Considerations for NRE

Be specific – global or general budgeting will likely leave

you well off the mark

This area is one of the most expensive components of chip

development; yet one of the least understood due to
the many technology risks imposed and disciplines
required

Certain items (especially purchased technology) need to

be researched prior to setting budgets

These costs vary widely depending on technology used

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 Non-Modeling NRE Considerations

Checking references on vendors and gaining insight from those

who have developed a chip with the technology you are
thinking are critical – missteps can cause your project to fail!

You do not want to be the first to try a new core, PLL, process,
etc. – no matter how cheap it is or how much support you are
promised

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 Cash Flow or “Burn” as a Startup

Cash IS everything in a start-up venture

• From the viewpoint of your funding source, you are NOT

creating technology, you are burning cash
• Your cash must last through the milestone that it was
designed to last through

Things to do:

• Renting or leasing vs. buying

• Being creative with financing cash flow structures
• Learning how to do more with less without significantly
impacting the development cycle
• The more you plan ahead for how you will implement your
design, the more opportunity to have to keep the cost under
control
• Create cash flows as quickly as possible

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 Cash Flow Considerations

Things to avoid:

• Feeling one has to “own” everything – if your venture fails, what good
is owning computers, emulation platforms, etc.?

• Not fighting for good deals or creative financing – not asking is not
getting

• Not using bank or alternative financing routes

• Thinking you need the latest and greatest

• Penny Wise and Pound Foolish - don’t save money to spend more time
in development – saving $10K by not having access to a tool, a piece
of equipment, etc. and spending another $200K for two weeks in
additional development time (the whole enterprise cost) as a result is
a major cash drain

• Related to the above, the whole enterprise is a cash drain until you
have a product to sell (and have cash flows from it)

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 Cash Flow Modeling

• Generally accepted cash flow methods follow:

– Indirect method is the most commonly used and what investors

are used to seeing
• Starts with net income adjusts for non-cash items such as depreciation
and then adjusts for changes in balance sheet accounts
– Direct method is used less often, but is the preferred method
• Lists major specific inflows (cash receipts, interest)
• Lists major specific outflows (wages, taxes, payments for merchandise)

• An indirect cash flow is helpful when you have a profitable,

growing business; it can highlight trends at a high level and is
more abstract

• A direct method cash flow helps you focus on cash inflows and
outflows to help you make better decisions – often a shorter
term focus – very important when in a start-up

• Recommendation: do both.

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 Cash Flow Modeling, continued

Types of cash flows:

• Operating – related to the day to day business operations

– Cash receipts from customers
– Payments for salaries
– Purchases of raw materials (wafers)

• Investing – related to making or recovering investments in the

business
– Fixed asset purchases
– Sale or purchase of a business

• Financing – flows related to obtaining or repaying capital

– Selling stock
– Stock option exercises
– Issuance (repayment) of debt
– Dividends

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 Example Indirect Cash Flow

ABC Company
Example indirect cash flow
Year ended 12/31/03

Net loss $ (3,000,000)

Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 20,000
Stock compensation expense 10,000
Changes in operating assets and liabilities:
Accounts receivable (300,000)
Inventory (250,000)
Prepaid expenses and other assets (1,000)
Accounts payable 150,000
Accrued expenses 25,000
Net cash used in operating activities (3,346,000)
Cash flows from investing activities:
Purchase of equipment and software (175,000)
Net cash used in investing activities (175,000)
Cash flows from financing activities:
Proceeds from the sale of Series B Preferred
stock 5,000,000
Proceeds from the issuance of common stock 2,000
Proceeds from equipment loan 250,000
Payments on equipment loan (25,000)
Net cash provided by financing activities 5,227,000
Net increase in cash and cash equivalents 1,706,000
Cash and cash equivalents, beginning of period 595,000
Cash and cash equivalents, end of period $ 2,301,000

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 Example Direct Cash Flow

ABC Company
Example direct cash flow
Year ended 12/31/03

Cash flows from operating activities:

Cash received from customers $ 525,000
Cash payments for wafers (350,000)
Cash payments for wages and other operating costs (3,516,000)
Cash payments for interest (5,000)

Net cash used in operating activities (3,346,000)

Cash flows from investing activities:

Purchase of equipment and software (175,000)

Net cash used in investing activities (175,000)

Cash flows from financing activities:

Proceeds from the sale of Series B Preferred
stock 5,000,000
Proceeds from the issuance of common stock 2,000
Proceeds from equipment loan 250,000
Payments on equipment loan (25,000)

Net cash provided by financing activities 5,227,000

Net increase in cash and cash equivalents 1,706,000

Cash and cash equivalents, beginning of period 595,000

Cash and cash equivalents, end of period $ 2,301,000

Note: In the direct method, what you are receiving cash for and what you are
spending it on are much clearer 20
 Cash Flow Modeling – Additional Points

• Often the timing of the payment of cash is important in

modeling and presenting to investors; be as precise as
possible and know why you have unusual outflows

• Link cash payments to income statement items and set

a period of time after which the liability will be paid such
as:
– Net 30, 45 days for vendors
– Month incurred for salaries

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 Methods for Weathering the Start-up Storm

• Build a plan that is realistic and that you think you can beat;
but not overly easy – your plans will be discounted by
everyone that views them
– Project plan – be realistic
– Financial model – be conservative
– Have rationale for the significant assumptions of your plan

• Timing is everything
– You must weigh hiring and purchasing plans against your realistic
project schedule and execute (over or under hiring kills)
– Buying things (expending cash) at the right time and for the right
amount of money is critical

• Realize that time is your worst enemy

– Every day past the day your enterprise is funded you have less
money to reach your goals, and thus less time
– Efficiency in execution is the only sword you have to slay the
dragon and be successful

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 What Keeps the CFO up at Night?

• Having to raise money when targets have not been met

– You will have dilution in every round of financing you do
– You will absolutely increase the cost of capital if your
organization does not execute to plan

• Managing what few resources you have (time and

money)
– Am I leveraging cash, time, people, IP and tools properly?

• Having a competitive product at the right time for the

right price in a large enough market – a list of deadly
situations:
– Spending $20 million to have a “me-too” product that
doesn’t command any premium
– Spending $20 million to have a product in a small market
– Spending $20 million to introduce a product into the
market too early or a market that doesn’t materialize

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