Q&A: IPV Capital’s Alex Banh
Semiconductors are a popular investment target in China on the back of US decoupling and a push for self-sufficiency. Alex Banh, a managing partner of sector specialist IPV Capital, shares his views
Q: When did the current chip investment boom begin?
A: From the beginning of 2019, we saw an increase in the valuations of our portfolio companies in the secondary market. The multiples were in the 80-100x range, compared to an average of 20-30x in foreign markets. The boom was also reflected in more deal flow and a wider variety of deals. Previously, China emphasized third-generation semiconductor compound, or gallium nitride (GaN) and so many start-ups focused on that area. Now they are more diverse. For example, we see them in digital-analog, which hasn’t been explored much before. When the market is strong, a lot of industry professionals are encouraged to launch their own businesses.
Q: How has China-US technology decoupling impacted IPV?
A: A few years ago, when raising our second fund, we approached family offices in Hong Kong, but they showed little interest in hard technology. This has changed. It is also much easier to find co-investors now. As for exits, we started making them in 2018, and since then chip company valuations in the domestic secondary market have increased significantly. Sino-US decoupling is a catalyst. It's a great opportunity for China to develop its own semiconductor industry. Meanwhile, in the US, the industry continues to innovate but the investment cycle is relatively long. Exits are more likely through M&A than superstar IPOs.
Q: What has worked out well for you?
A: We are an early-stage, US dollar-denominated venture capital investor, and we have been focusing on semiconductors and the extended industry for more than 15 years. We have invested in more than half of the start-ups responsible for the most valuable chip design IPOs globally over the past decade. These include Maxscend, SG Micro and Ingenic Semiconductor in Shenzhen, GigaDevice Semiconductor in Shanghai, and Star Market-listed National Silicon Industry Group.
Q: What’s your investment strategy?
A: Since Fund I, our investment thesis has been import replacement, and our most successful exits fit into this theme. Some investors say import replacement is not enough. While the ultimate goal is to surpass international peers, you can’t do it on day one. You need to be able to do import replacement first, and then innovation. When Alibaba Group started, it had a similar business model as eBay, but today, it’s one of the most innovative e-commerce platforms globally. This strategy replace-then-innovate strategy has worked for us.
Q: Should semiconductor investors target emerging markets over existing markets?
A: Existing markets are proven. When talking about new markets such as AI [artificial intelligence] chips, you must ask how they have performed recently. Customer acceptance is an important consideration regarding new markets. 2B is different from 2C, and it takes time for enterprises to adapt to new solutions. In the chip industry, we typically move step-by-step: from easier tasks to more difficult ones, and from consumer-end-use products to industry-level applications. The latter have higher requirements in terms of accuracy and the margins are better. We have a portfolio company that makes sensors. It is doing well on consumer-level products, and it is now entering the automotive vertical. Maxscend started with radio frequency (RF) switches and expanded into surface acoustic wave (SAW) and low noise amplifier (LNA) technologies.
Q: Are valuations overheating in certain segments?
A: It is hard to justify the valuations for some of those computing chip start-ups. The challenge for computing is not only making the hardware work, but also building the entire ecosystem. Some tracks look very sexy, but there are other, less sexy ones with clear business models.
Q: Which ones do you prefer?
A: I like analog. Quite simply, it involves converting a sound or visual signal into a digital signal. Maxscend and SG Micro specialize in this area.
Q: Do you worry that your cautious approach to investment could see you miss out on future unicorns?
A: We stick to what we know, and we don't invest in what we don't know. This is our principle. No one can catch every unicorn.
Q: How important are strategic investors to the development of chip start-ups?
A: This is a double-edged sword. Maintaining a comfortable distance from a strategic investor is very challenging. We’ve seen portfolio companies do well without any investors from within the industry.
Q: How long can the current boom last?
A: China wants to be self-sufficient in semiconductors, which is a long-term strategy. The US started out on the same path in the 1970s, and the industry has been whittled down from more than 2,000 semiconductor companies to a few dozen. That’s a 40-year process. China also has a long way to go. It will take 20 years of development before the industry matures.
Q: How about exits?
A: I think a mainland China IPO is the most sensible option for a China-based semiconductor company.
Q: What kind of qualities do you look for in founders?
A: To start a business in China, a certain wolfishness is still necessary. That’s to say you must stay very hungry. Is this a fight for life or death or just a nice-to-have on your CV? In addition, founding teams require a certain amount of experience in China. If it’s a team made up entirely of returnees from overseas, they won’t be able to adapt to the local culture and speed of doing business.
Q: What advice do you often give to portfolio companies?
A: Choose your customer. Is it worth bringing in a particular company as your first key customer? And tell customers that you will only do a proof-of-concept exercise or testing if their performance meets certain criteria. In some cases, I advise companies to focus on supplying design houses and distributors, rather than local brands. Local brands in the semiconductor space are often strong on marketing and weak on technology and it takes so much time and effort to communicate all the details. Design houses and distributors already have the domain knowledge, so you don’t have to invest in explaining it to them.
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