This article is from Diandi Industry, Sun Yeping

To begin with: 2020 was a year of great excitement for semiconductor companies and semiconductor investments. The high market value in the secondary market led to craziness in the primary market. Behind the madness should be calm thinking and responses. Through the experience of investing in six projects in 2020, I have recently been reflecting on the underlying logic of semiconductor investment, and I hope to share insights with various companies and investment institution leaders.

 

• What exactly is being invested in, especially in semiconductor investment?

• A simple understanding of investment - track, trend, fate

Investment is an elusive and versatile profession. Whether you think you have invested in the right project, as long as you believe and invest, you have embarked on a journey of investing in the right project. Coupled with the company's revenue growth and valuation increase, it further validates your judgment at that time, creating a sense of value. However, the success of a project or a company involves too many factors. Here are three examples:

First is the fate of industry trends. Recently, many semiconductor companies were struggling three years ago, with little attention. Due to the US-China trade, domestic substitution (which importantly provided testing opportunities, even bringing sales to hardware-focused companies), and the dividends from the Sci-Tech Innovation Board, semiconductor companies and investments have come to the forefront, causing investment institutions to generally present an "outsider" posture in investing in projects - the older generation who value relationships tend to be relatively friendly in offering shares and discussing matters, at the very least, they will meet and chat; otherwise, it is quite difficult to even arrange a meeting.

Second is the fate of industry cycles. In 2020, due to the pandemic, many companies had relatively low shipments from March to May, especially in consumer electronics. Unexpectedly, the automotive, mobile, TWS, and cloud sectors drove a surge in screens and chips, resulting in 80% of semiconductor companies experiencing relatively good performance growth, leading to continuous tight capacity. It is expected that in 2021, mobile manufacturers will reach a relatively balanced capacity point, and capacity issues are now being discussed by companies, saying that if they can solve capacity issues, they will let you invest. Can you solve the capacity issues? In 2020, apart from some large clients, the performance of companies relying heavily on a single large client was relatively poor, indicating that single-client dependency indeed poses some problems.

Third is the fate of track fluctuations. Industries with long theoretical cycles such as LiDAR, automotive chips, and complete vehicles, as well as the surging TWS industry, have seen many investment institutions experience a relatively quiet period from 2019 to 2020, only to suddenly explode with the dividends of the entire industry chain from the end of 2020 to 2021. In 2020, all new car-making forces went public, and the LiDAR company Hesai went public after six years. This indeed reflects the fluctuations of the track, which can also lead to the establishment of public companies in 5-6 years. This requires some gambling spirit from investment institutions.

 

For investment institutions and companies,,the listing and success of a company must involve the efforts of institutions, companies, and entrepreneurs, but the track, trend, and fate are equally important.. 

1. 2.The logic of semiconductor investment institutions

2016Years ago, I entered the semiconductor industry. At that time, all investment institutions could gather around a table for meals. Now, there is no investment institution that does not invest in semiconductors; not investing might mean being "out-man".However, each investment institution possesses platform strength and underlying logic. Currently, I categorize semiconductor investment institutions into three types: CVC, industrial investment, and financial investment institutions, each with relatively different investment logic.

First, CVC investment institutions possess considerable sales capabilities. For example, current giants like Huawei, ZTE, Xiaomi, OPPO, and Transsion, as well as large companies like Weir Shares and Zhaoshengwei, are direct terminals. The investment from CVC is relatively related totheir own business synergy.However, this does not prevent them from simultaneously investing in companies with high financial returns. CVC has a strong amplifying effect on the endorsement of companies, recruitment, and valuation growth. Recently, many companies have directly stated that they need strategic resources.Therefore, CVC colleagues are currently in what should be the happiest era of investment. It cannot be said that they can 100% invest in everything they want, but generally, most companies will not refuse.

Second, industrial investment institutions possess strategic resources and project sources. Established strategic investment institutions like Yuanhe Puhua, SMIC Capital, Wuyuefeng, and Huaden International each have corresponding capacity, connections, concepts, or market resources behind them. Their investment logic is alsothe choice of track - recognizing the track - implementing it into the choice of people. Similarly, in terms of investment, they have certain advantages in re-evaluating and investing in projects. Although some friends in the circle also reflect that many projects are difficult to manage, relatively late-entering investment institutions have enjoyed the dividends of 2016 and even earlier, and many projects will actively reach out to them. The investment cases of institutions in the circle are outstanding; I heard that in 2020, SMIC Capital invested in over 50 projects, while Yuanhe Puhua invested in around 30.Third, financial investment institutions need to do more in terms of logical sorting.

 

(1)

（1）品牌效应明显的大牌美元基金直接用品牌效应、资金效应打造明星项目，比如高瓴和五原资本都开始投资天使轮1亿美金的项目，GPU项目一年顶到独角兽，同时将互联网投资打法，估值翻倍、大赛道、牛人创业、用更多的品牌和资金把你顶到前列的位置，目前这种模式正在进行中，最终是否成功需要时间验证，但对于半导体的容忍失败的程度、方向的选择等等都是相对有别于互联网企业。

（2）财务性投资机构对于逻辑的投资想要赚到更多的钱需要在更多的方面化的时间更多，需要在赛道和人的方面做更多的文章。总体个人认为对于半导体的底层的投资逻辑应该是如下序列：

----选择赛道（低端赛道已经被占据，选择市场大市场、迅速起量、差异化高端赛道或者空白的赛道及新兴的方向）

----提升认知（无论是用勤奋在所有企业沟通学习还是通过业界、通过市场反馈、通过自我认知提升，遴选出每个机构合适及认可的一个企业，认知范围的钱不会赚到的，赚到一次下一次还是会还回去）

----Human determination (a deep consideration for founders and entrepreneurial teams, technology is also a key direction. I have mentioned multiple times that the focus is on people, regardless of the stage, the founder's ultimate understanding of entrepreneurship, the pattern of accomplishing things, determination, team cohesion, friendship, character, etc., including whether they can collaborate in the future. I firmly believe that deepening and strengthening the enterprise will lead to a broader path for institutions and individuals in the future. The companies I invested in personally in 2020 have all done some collaboration, while also communicating fully, promoting some matters collaboratively, and integrating personal resources accordingly. Investing in semiconductors is never a one-time deal; adhering to this principle, I believe there will be good results.

----Reasonable valuation (many institutions blindly rushing into some projects do not pay attention to the perspective of valuation, which is relatively dangerous in the later stages for both enterprises and institutions. For enterprises, high valuations will revert to their original state after the tape-out, and failing to complete each "milestone" will make it very uncomfortable when the valuation decreases in the next round of financing. It is equally dangerous for institutions; if enterprises face problems after financing, it will put immense pressure on the institutions, not to mention "exiting."

---Timing for exit (enterprises need not mind; capital is profit-seeking, as there are many demands from LPs behind it. However, for ordinary institutions, helping enterprises find the right timing for exit at certain nodes is reasonable, and the timing of exit allows enterprises to find more suitable institutions, which is the only way to go further with the enterprises.

 

• Discussion on future investment directions in the semiconductor industry

• How long can the semiconductor industry continue to thrive?

For the semiconductor industry, the gap with Europe and the United States, especially in semiconductor foundry, materials, and equipment, is estimated to be another 20 years. However, the current window period for semiconductors is a golden period of 3-5 years. If enterprises can accelerate their listing or continue to expand during this window period, they should continue to accelerate.No matter how low the listing threshold is currently, we are still in the spring and autumn period of semiconductors, far from the unified era of the Qin Dynasty. Therefore, whether to pursue capital, differentiation, or a high-end, planned path to strengthen oneself always holds its own value.Investment institutions have also reaped the benefits in recent years, building brands and effects. After all, semiconductors are a long-term matter, always deriving new directions and tracks, thus feeding on "long-term".Especially for investment institutions that are friends with enterprises and friends with time, this is even more evident in the semiconductor industry. Regardless of how fast capital accelerates, the product cycle of 3 years remains a fate, with the fastest being 2 years.

 

1. 2.  Discussion on future investment directions in semiconductors

The main choices for future terminal tracks are in the fields of consumer electronics, Mobile, wearables, automotive, and white goods. Focus can be placed on automotive electronic chips and white goods chips. The penetration rates of power, power, signal chain, sensors, high-end MCUs, motor control drives, storage, and connection chips in these two fields are only 5%, which still presents huge opportunities. The chip directions in each subdivided field are as follows:

(1) Digital circuits

I firmly believe that in the next decade, China will definitely see leading enterprises in the fields of baseband chips, network switching chips, memory, CPUs, FPGAs, GPUs, DSPs, EDA, and high-end MCUs. Therefore, capable institutions can make appropriate layouts, but still adhere to that principle.If the cognition can select the enterprise that is sure to succeed among many enterprises, the layout is not a problem, and there will be significant returns. However, investing in enterprises only transforms into whether the enterprise can raise enough tens of billions to do this. I think this may be somewhat deformed. Personally, I believe that enterprises with a solid foundation in the low-end are gradually moving towards the high-end, provided they find the right people, or those many enterprises that have persisted for 10 years. For example, the founder of an FPGA company repaid debts of over 100 million while gradually paying back the original employees' salaries. Such a founder with a vision and faith is indeed rare, and I firmly believe there will be good results.Secondly, silicon-based semiconductor manufacturing requires huge investments and is suitable for support from national funds.Specialized compounds, third-generation semiconductors, and analog devices and processes are suitable for support from most funds. Heavy but not too heavy.

Thirdly, packaging and testing companies like Longji and Tongfu Microelectronics have entered the first tier and do not require support from small funds. They are suitable for integration and mergers by national large funds.Regarding the current situation of seizing production capacity, specialized process packaging and testing lines can select quality projects for layout.

Fourthly, high-end lithography, CVD, and other equipment require huge investments and are suitable for support from national large funds.CMP

, bonding, testing equipment, and component companies are suitable for support from most funds. At the same time, investing in equipment companies can collaborate with industry institutions, such as cooperation with Hunyuan Investment, which has a very complete layout.Fifthly, IP (RISC-V) and EDA tools can be explored for support, but the cycles are relatively long. The early quality projects such as Chip Origin Micro, BGI Jiutian, Chip He Technology, Guangli Micro, and Gai Lun Electronics all have the potential for listing. For new technologies like Chip Lai Technology and Saifang Technology, they can be laid out at the forefront.(2) Analog circuits

Analog integrated circuits have always been a relatively fragmented industry. The large enterprises currently listed are still relatively small compared to TI, ADI, etc. Moving towards IDM direction and deepening product lines are both good directions. Domestic companies have laid out the low-end analog market quite well, and the focus in the analog field should be on high-end directions.

For example, companies with power supplies over 36V, base station power products, high-end clocks, and mixed-signal WIFI6 fields, even high-speed Ethernet, etc. Insisting on becoming the first or second in a field and then expanding into other areas is a relatively stable approach for analog.

(3) Sensor MEMSThe sensor track is also a fragmented and small track, but the overall gap is still quite large. Whether it is high-end gyroscopes, accelerometers, or monitoring power and environmental sensors for base station servers, they are still monopolized by foreign leaders, with domestic companies occupying only about 10%. Seeking founding teams that adhere to long-term strategies, solid technical teams, and outstanding market teams. There are still opportunities for investment in this track.

(4) Power and optoelectronic devices

Currently, there are at least 30 domestic entrepreneurial teams in optical communication optoelectronic chips. In short, there are still opportunities. Finding suitable teams for layout will always yield good exit results. The market penetration for power is currently only 10%, whether it is MOSFET, IGBT, etc. Choosing suitable teams for layout and collaborating to pursue high-end paths can also find a place.

(5) Materials, equipment, and specialized processes

光通讯光电芯片创业团队目前至少国内有30多家，总之还是存在机会的，找到合适的团队布局，总会有好的退出结果。功率的市场目前还是渗透率仅仅10%，无论mosfet、IGBT等等，选择合适的团队布局协同走高端的路也能找到一席之地。

（5）材料、设备及特色工艺

In terms of materials, it is the company with the worst domestic foundation but also has a relatively low ceiling. Finding materials that can break through 100 million and are versatile can lead to a path towards capital, but this cycle may be longer than design.

The demand for domestic substitution of material equipment is very urgent now. Whether it is existing companies like SMIC, Huahong, etc., which have clear demands, the domestic layout of HW will lead domestic companies to achieve a certain leap in software, materials, and equipment. Focusing on key tracks, even if it is just components, as long as the core technology is domestic, this threshold is relatively high.

The scarcity of specialized process lines is now evident. Whether it is the production lines of SMIC Shaoxing, Silergy, or the layout of third-generation semiconductor companies, they have attracted capital's attention. Therefore, being able to solve analog, MEMS, and third-generation semiconductor lines is scarce and will have a good market value in the capital market.

(6) Frontier Directions

 

Focus on frontier fields such as silicon photonics, quantum, fourth-generation semiconductors, carbon-based technology, industrial internet, and high-speed connections, as long as the team is solid and lays out early.

In the automotive and white goods sectors, focus on some domestic replacements and new chip products, even if they are as small asinterface chips.

 

• Investment strategies and challenges in semiconductors

First,find the right people to invest.This is an empty input and cannot be translated.Starting a semiconductor business requires technical accumulation and certain financial support to sustain subsequent R&D and tape-out investments. Emphasizing industry reputation and word-of-mouth, and maintaining openness can attract top talents to the team, combining technology, management, products, and market organically.Whether to invest or not, helping to make friends first is my personal principle.

Second,cooperative investment to reduce risks and assist enterprises.This is an empty input and cannot be translated.In the past year, investment projects have cooperated with Huaden, China Resources Capital, ZTE Venture Capital, Yuanhe Puhua, and other industry institutions, providing the resources needed by enterprises from different institutions to accelerate their growth.

Third,enhance cognitive ability.This is an empty input and cannot be translated.In the era of information sharing, advanced technologies are constantly emerging, requiring constant tracking of the latest technological developments and dynamics. By continuously learning and consulting with industry insiders, one can enhance their understanding (establish their own insights). Deeply rooted in the semiconductor industry, being familiar with people and matters related to semiconductors, one can build themselves into a small information "hub," enhancing their own value. Naturally, good information and projects will come to hand, relatively effortlessly.Link more enterprises and people through personal connections, thereby establishing a unique network.

Fourthis to persist in learning fromdifferentpeople.Different institutions and enterprises have different understandings and access to information, while more people acquire more knowledge and resources.Establish a mechanism for long-term connections and learning,persistently connecting with 3-4 institutions or enterprises each week.For long-term connections and tracking of enterprises, it can comprehensively assess the growth of enterprises each year, thus enhancing confidence in oneself and the institutions' investments. The recently invested projects have all been tracked for over a year,while also forming a tracking period of several years, laying the groundwork for investment for a year, investing in the same year, and reserving projects for future investment, forming a virtuous cycle.

Fifthis to firmlyrecognizethe accuratedirection,dare totake action. Forthe selected quality tracks and quality teams, persist in taking action. Believe that long-term friends are always valuable friends.Sixth

is to find leading companies in niche fields,and lock in industrial directions.In the consumer circuit field, China is already in a leading position, while high tape-out costs make small funds and investment risks relatively high. Therefore, focusing on industrial and analog fields is a good choice. At the same time, large tracks have already been monopolized by domestic giants, so finding leading companies in niche fields is a good return and direction.First, persist in moving forward steadily,

with products as king and capital as support.Even in semiconductors, it takes about 5 years, so multiple rounds of financing are inevitable.This is an empty input and cannot be translated.Do not overestimate valuations to make it difficult for both enterprises and institutions.Choosing is more important than effort. Entrepreneurship requires in-depth research on market demand and direction; it is not enough to just produce a product to sell. China still has channels and business models, so choose the right track and invest heavily.

Second,Third, continue to insist on surviving until the wind rises. In a good era, not all enterprises are smooth, but under competition in China, it may not be easy to survive well. Surviving will eventually bring sunshine; many semiconductor companies that have gone public now have been around for over 10 years.

Fourth, institutional investors need to treat it relatively calmly. Reasonable bubbles are acceptable, but excessive bubbles will eventually overflow.

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