Investing in CPU, GPU and DPU in succession, what kind of market opportunities did Sky9 Capital see?
Davy Shen, Executive Director of Sky9 Capital, told Chinese media outlet “Semiconvoice” that there are no deals that financial investment institutions must do – and if there are, they are large-scale companies. “Domestic firms developing alternatives of foreign products is a valuable investment theme, but the companies invested in by Sky9 Capital are not just doing that. They are innovating in the same era as global chip companies and making products for the global market.”
Sky9 Capital is a Chinese venture capital firm dedicated to supporting disruptive technologies and outstanding innovators. Davy Shen focuses on investing in hard tech industries such as semiconductors and new energy vehicles. He has started investing in semiconductor startups in China since 2020, including DPU developer YunSilicon, CPU and general computing solutions provider CIX and general GPU manufacturer Biren Technology.
Innovating in the Same Era as Global Chip Giants
Davy Shen roughly broke down semiconductor startups into two categories: one is making single hardware such as semiconductor components; the other is involved in software, hardware, systems and platforms, e.g. Intel, NVIDIA and Qualcomm, which have established complete ecologies and the highest technical thresholds.
Sky9 Capital focuses on large semiconductor firms, and sees a series of new products and technology trends led by these companies at present. For example, data centers need highly integrated systems to improve efficiency in the future, while heterogeneous computing is being recognized by more and more tech firms.
NVIDIA is regarded as the wind vane for AI. Jensen Huang, the co-founder and CEO of NVIDIA, believes that CPU, GPU and DPU are the three pillars of the future data center market. The semiconductor firms Sky9 Capital invests in operate within precisely these fields. Shen said that Sky9 Capital hopes to find China’s future semiconductor giant by entering key areas together with many other investment institutions and that is no coincidence with Huang’s assertion.
In terms of CPU, Sky9 Capital invested in CIX, a general intelligence chip company. CIX was established in October 2021, focusing on establishing a general intelligence-based system compatible with the ARM instruction set for notebook, high-end tablets, AR/VR and others, benchmarking Apple’s independently developed chip, the M1.
In GPU field, Sky9 Capital is betting on Biren Technology, which was established in 2019. GPU BR100, the first chip developed by the company, completed tape-out in 2021 and is expected to be released this year.
DPU is a new class of programmable processor and will join CPU and GPU as one of the three pillars of computing. Sky9 Capital has invested in YunSilicon, founded in May 2021, which focuses on cloud datacenter network chips.
China’s digital transformation, changes in the international political and economic situation, and increased emphasis on information security at the national level enhance the development opportunities of Chinese chipmakers. At present, there are many ongoing discussions about the potential market space for domestic CPU and GPU firms.
On the whole, the market had saw the opportunities of Chinese GPU firms earlier, and frequent financing events making it one of the hottest fields within the broader semiconductor industry. Shen believes that this shows the potential and the huge demand of GPU markets.
He emphasized that tape-out is only the first step of a chip’s developing process. Next, companies will compete for performance, application effects and software ecology, leading to a widened gap. In particular, the advantages of companies that pay attention to software ecology will be continuously highlighted.
After the success of Apple’s M1 chip on PC marketpalce and Qualcomm’s launch of an ARM-based CPU, more Chinese manufacturers have begun to see the opportunity of ARM-based CPUs.
In particular, Shen pointed out that the ARM instruction set has experienced explosive development in the past decade, and its performance and ecology have been greatly improved. Chip companies can directly leverage ARM to build a good ecology with its business model. At the same time, the advanced process competition in wafer foundry in the future will also affect the competition between the two ecologies. If TSMC continues to dominate the competition with Intel, it will also benefit the rise of ARM.
Compared with CPU and GPU, DPU is still in a very early stage, with an uncertain product form and system architecture. Companies are exploring with their own understanding and advantages. Given the fact that chip performance is subject to the manufacturing procedure, cost and power consumption, Shen believes DPU will play an important role in data centers. Sky9-backed YunSilicon focuses on the network side, which is actually betting on the corresponding technical route.
China’s Innovation Strategy Brings More Certainty
Investment in semiconductors in China has continued to be strong for over two years, but it has encountered an inflection point in 2022.
Shen noticed that in the first half of this year, the market value of many semiconductor companies in the secondary market decreased by half, and the expected return in the primary market also decreased, and the investment pace of capital market is significantly slowed down. He also pointed out that a large number of semiconductor talents are overseas, and the situation of relative shortage of domestic talents also brings fluctuations to the domestic semiconductor market. Since 2020, the industry has witnessed a doubling to threefold increase in average salaries.
As a highly capital-intensive industry, semiconductor companies rely heavily on external conditions. Shen believes that the national strategy of developing the information technology innovation industry and the policy of Shanghai Sci-Tech Innovation Board (STAR Market) have brought support to the current semiconductor field in the country. The STAR Market, which provides a “green channel” for IPO higher market value, and the policy that R&D investment can be capitalized, is highly suitable for semiconductor enterprises.
In China, domestic companies developing alternatives to foreign products has always been an investment thesis for institutional investors. Marked by the country’s state promotion of the information technology innovation industry since 2020, this field has gained 100 billion yuan ($15.0 billion) in market value. Shen believes that with this background, adopting domestic products and software services can bring more external certainty for Chinese enterprises.
According to calculations by CITIC Securities, in China, 30.32 million people are working in the medium-sized information technology innovation industry (including government agencies and institutions, excluding education and healthcare, etc.), which means it requires 21.22 million personal computers and 1.06 million servers. Industry experts believe that this year will be a milestone for the industry, with a procurement scale more than twice that of 2021. It is estimated that by 2023, devices used within the government, private firms and state-owned enterprises in those industry will purchase 10 million new devices each year.
Some may worry that if local manufacturers just focus on producing alternatives to foreign products or making products adapted to the domestic IT innovation, they may not be able to provide globally competitive products. In Shen’s view, the IT innovation will lead to a more commercial marketplace. Optimistically, he said that in the future, domestic products will be continuously updated. Some products with slow iteration may still have low-level substitution, but products like GPU devices need to compete with international rivals in terms of performance.
Innovation is Disruptive, While Sky9 Capital is a Long-Termist
In which areas are the penetration rate of localization relatively low? Which sectors are growing fast and which angles are easiest to cut in? Apart from paying attention to macro trends in the semiconductor industry, on the whole, Sky9 Capital still uses simple investment logic to seize the opportunities
Shen shared that no matter how good the market is, it will not make a company succeed. Meanwhile, some innovators can still win in seemingly difficult industries. In essence, it is always the team, technological advantages, the cutting-in angle, resource integration abilities and other factors that drive the success of a company.
When prospecting a company, Shen focuses on technology and whether the founding team had entrepreneurship. On the technical side, he pays special attention to the integrity of the team and whether it has mastered the core technologies in the subdivided fields. Besides, he pointed out that not only semiconductor, the fields that Sky9 Capital invest in are all very difficult, requiring top-level teams and technical strength.
He believes that Sky9 Capital has two advantages when investing in the semiconductor industry. First is the long-term investment philosophy of focusing on high-potential firms and the team’s cross-sector understanding of multiple technology fields. Second is the long-term investment ability that matches the growth of semiconductor startups.
He explained that technology innovations often appear in the form disruption. The reason why Apple’s mobile phone and True Wireless Stereo changed the market is deep insight into the demand side, instead of research from the industrial chain. Sky9 Capital’s investment team focuses on various fields and cooperates closely, which requires the integration of thinking and observation. At the same time, their understanding of technology helps to match the needs of startup founders.
Sky9 Capital has a long investment cycle, which means that it is more suitable to participate in projects that take longer to succeed and have high ceilings. Specifically, it is difficult for CPU and GPU firms to achieve results in a short time. Therefore, some funds that hope to exit within four years may not be able to wait until the harvest period. Shen believes that long-term investment is an ability. To examine whether a venture capital firm has this ability, we can see whether they identify opportunities with sustained high growth in 5 to 10 years, and provide long-term support, financially and strategically.
The long-term capability has always been emphasized by Sky9 Capital. However, in recent years, chaotic developments in this industry have been in heated discussion, such as neglecting due diligence, and financing based on a pitch deck.
Shen believes that these phenomena only reflect that the capital market was too aggressive before. All startups start from a pitch deck, but the focus of controversy is that some unqualified companies just secure too much financing in this stage. He also noted that semiconductor firms need to possess the capacity to continuously secure funds during its development. The ecology of products like GPU is very important, so it is necessary to invest in the software side in advance and prepare for R&D cost for a three-year reserve. “The money burn in the software side is invisible, but it’s crucial,” Shen said.
The Chinese government has also set goals for the semiconductor industry around the theme of technological autonomy. As an investor in the primary market, Shen admits that these goals are challenging at present. But on the positive side, local enterprises are making great efforts in various fields, even in the most difficult arena of GPU. Challenges come with opportunities. As a venture capital dedicated to long-term investment, Sky9 Capital will continue to seeking outstanding startups with both technology and vision in this blooming industry.