Small Businesses and the Semiconductor Industry

Well, welcome back to everybody that has joined us today. I would like to just say again a very sincere thanks to Administrator Guzman for her continued leadership and support of our efforts related to innovation, support and investment in small businesses and startups so critical to the growth of our economy and the creation of jobs. Her remarks were incredible. And I cannot believe again that we are at our third annual Innovation Ecosystem Summit. And I understand we have over 700 individuals that are with us at this moment from across the country. It is just truly inspiring. So I thank all of you for joining. I thank the administrator for her leadership and also Brittany Sickler and Jennifer Shee within our office who are leading this important effort and continuing to create opportunities for us to connect with entrepreneurial support organizations across the country. I'm now pleased to kick off our first fireside chat of this summit. And I am so honored to be joined by two national leaders supporting the reshoring of semiconductor manufacturing and advancing US Technology leadership. Please join me in welcoming to the stage Arjun Gupta and Srujan Linga. Arjun and Trujan, thank you for joining us today for this conversation. And I know the next 30 minutes is going to go by very quickly, it always does. But I would like to start by providing the opportunity for both of you to introduce yourselves and share more about your current work. Arjun, would you like to begin?

Sure. Thank you, Bailey. And thank you to the whole sba. I'm delighted to be here. I run a fund called Telesoft Partners in Silicon Valley. I've been doing it for about 30 years and I invest in all segments of technology, including semiconductors, conductors. We've done about 250 companies over the last 30 years. 150 have gone public, have been acquired, and so we've been very lucky. And I'll tell you more about it as we as we continue. Thank you.

Wonderful. And Srujan, great.

Thank you, Bailey. Hope you guys can hear me. Okay. My name is Sujan Linga. Thank you, Billy, and the SBA team for giving me this opportunity of being on the panel today. I joined the CHIPS program as the Senior Investment and Financial Structuring Director about six months ago. My responsibilities for the program include sizing and structuring the awards, thinking about how best to optimize usage of taxpayer dollars in order to support our national economic security mission. In addition, I'm very focused on activating private capital and how we can think about using some of the tools in our toolkit to stimulate pockets of private capital to come in and support our effort. Prior to This, I was at Goldman Sachs for about 16 years where I ran multiple businesses for the firm. Most recently, I was running their structured credit financing business at Coleman Globally. So great to be here. Thank you, Billy, for the opportunity again.

Oh, well, thank you. And I must say, having had the opportunity to start working with both of you in different capacities. Arjun, as the vice chair of our new federal Advisory committee Committee on Investments and Srijan brainstorming ways that we might be able to take a whole of government approach around chips, I'm just very impressed and very appreciative for the work that both of you are doing. So I'll start off by saying right, the very transformative CHIPS and Science act has caught, not surprisingly, the attention and interest of many investors, small and large businesses and entrepreneurial support organizations since it was enacted. And through the legislation, President Biden appropriated $50 billion to the Chips for America program to support both research and development and returning manufacturing to the United States. It is incredible. And this includes 39 billion for the Department of Commerce to onshore semiconductor manufacturing through an incentive program and 11 billion to advance US leadership in semiconductor research and development. So it is a tremendous amount of funding that is designed to encourage and support public private partnership and crowd more funding into this area so that way we can be leaders in the semiconductor industry and create incredible jobs. Arjun, I'd love to start with you. You have successfully invested in all segments of technology, including the semiconductor industry for over 30 years. And you just cited just incredible numbers of the number of companies that you have funded and helped to scale and grow and successfully, it sounds like exited over 150 of them through acquisition or, or going public. So you have a wide perspective and an industry perspective. Given that, how would you say the industry has evolved and what is different about this moment right now?

Thanks, Bailey. So as you can tell, I've been involved with the tech industry for 40 years, since 1980. And you know, I've lived through four platforms. First was the PC that created all of the enterprise apps. That was essentially started in 1980. The second, in the early 90s was the mobile platform that started with analog and then became digital. The third, let's say in the late 90s was the Internet which created IP, the common protocol, and then all the websites and search. And the fourth was the cloud, which is approximately 1999 or 2000 when Salesforce went public and that created the whole app economy. So now we're on the fifth, which is the start of AI. And AI will dwarf all the other four and will build on all the other four. So in the first one in the PCs, America had an absolute advantage in semiconductors, both on the R and D side as well as on the manufacturing side. When Qualcomm evolved in the mobile. In the second platform, slowly TSMC was coming up and various other Asian manufacturers were dramatically cheaper on the manufacturing side. But design was always still driven in America. And then in the Internet, we started focusing more on software and the higher layers of the stack. At the same with the cloud, which I think took our eye a little off the ball with respect to semiconductor. Now the reality is that no software can run without hardware and the heart of the hardware is semiconductors. So we have to re own it. We have extraordinary opportunity with artificial intelligence because we are going to go from CPUs to GPUs, from normal memory or RAM to, to HBMS high bandwidth memory. The whole stack has to get recreated. So I look at it a little bit like two dimensions. One is fab or fabless. A lot of the US companies are fabless and the other is small versus big companies. So the big companies have the installed basis, the history, but the small companies are really where extraordinary innovation is coming.

Thanks.

Sorry. Just to give you one statistic, and this is Shrujan and his team. Since the CHIPS act has, has. Has been announced, the increase in semiconductor investments is going up. So we have the. We had a 68% increase in semiconductor investments in Q3, which is. There's only two segments right now. As you know, we are going through somewhat of a downturn. And so there are only two segments, AI and semiconductors, that actually increased quarter over quarter as opposed to decrease.

It's incredible. And I would love to turn to Srijan to hear what the CHIPS Investment office is focused on now playing a major role in this transformation. Srijan, would you enlighten us? I'm sure everybody is dying to hear about your work.

Absolutely. Thank you, Bailey. I think in terms of the objectives for CHIPS program, as you rightly pointed out, this has been a bipartisan bill that is very rightly being passed by both sides and supported by both sides of the aisle. The major focus for us has always been on national economic security and supply chain resilience. And this has been the goal since day one. To Arjun's point, since the act has been announced till date, more than $231 billion of private sector capital investments have been announced in this space. So essentially the CHIPS act has served as a galvanizing force to stimulate private capital to come in and support this effort in terms of the leading edge manufacturing base, which us used to be a leader many decades ago, today that market share has dropped to low single digits. And our goal is by 2030 to get that to mid teens. In terms of global semiconductor manufacturing capability, one key thing that we are very focused on is the U.S. technology leadership. And without having advanced manufacturing and the associated R and D with that, it's very difficult to maintain our leadership in technology. And so that's another reason why we are very focused on taking a holistic approach which includes not only getting manufacturing back to the US but also R and D and development of new technologies back to the US. So with that in mind, the way the CHIPS act has been, or the CHIPS program has been structured is we have two portions of this. The first one is $39 billion of manufacturing incentives and in addition to that $75 billion of loan and loan guarantee capacity, which you know, to the small business community could be something that is of interest. And we are working on a number of initiatives there which we'll touch upon in a minute. Separate and apart from the manufacturing incentives program, we also have the RD program which is about $11 billion. This is across principally grants, I would say. We also made a recent announcement regarding setting up the NSDC and also a 3 billion dollar national advanced packaging program also which sits within that 11 billion umbrella. In terms of what we are focused on right now, we are very focused on processing the applications and getting the awards out of the door as soon as possible. We have received over 550 statements of interest and about 130 applications and pre applications and concept plans from the semiconductor community. We are a small team, we only have about 30 people in the investment office. And so we are working as hard as we can to process this incredible demand and support that we received from the semiconductor community. Lastly, I just want to touch upon the fact that even though $50 billion is a lot on a standalone basis, it's not nearly enough for what we need to get us to the technology leadership achieve national economic security goals that we have in front of us. The real number perhaps is about eight to ten times that amount. And so one of the key things we are focused on is how to develop public private partnerships, how to work with various investment institutions, including SBIcs, including investment managers, fund managers, to best use the tools that we have in our toolkit to stimulate various pockets of capital to come in. You know, the CHIPS program money is not meant to displace private capital, it's meant to complement private capital. We only want to deploy taxpayer dollars only when it's absolutely necessary. And it should not be used as a displacement for private capital. It's only a complement for private capital. So that's been a key goal and objective for us, which we've been working through over the past couple of months.

I'm so glad that you shared that point as you know, with our investment office. It's a philosophy that we share around the use of federal funding as a way to de risk or further incentivize or improve the return profile. So that way private capital can be crowded in. And it is just tremendous that that is the approach that's being taken here, particularly given the need for more funding, so making this area more attractive for private investors to come in. It is truly excellent that that is the approach being taken. If you don't mind, I'd love to delve in a little bit more. Well, actually, before I do that. Actually no, we'll jump there first. Can I jump right into small business financing? I know that Commerce does a lot of large. Right. But you understand quite deeply, which I think we all appreciate that building the supply chain in the semiconductor industry is critically important, that this isn't about supporting single corporations and a handful of organizations, that it takes an ecosystem. So how is your office thinking about different and innovative approaches to financing small businesses in the industry? And do you envision future funding opportunities for small businesses and potentially the entrepreneurial support organizations that work with them?

Yeah, absolutely, Billy. That's actually top of mind for us in terms of the vision for the program. One of the key pillars of our vision is to create a vibrant ecosystem around the semiconductor manufacturing fabs and clusters that we envision getting built across the U.S. semiconductor suppliers and smaller manufacturers are a key segment of that of that ecosystem and really underpin the success of the ecosystem. And so we are very focused on making sure they get the funding they need and we are an accident to their development. To that end, what we have done is we've announced a notice of funding opportunity for smaller suppliers, manufacturers, equipment providers, as part of the larger $39 billion program. This is focused on projects which have a capital investment of less than 300 million in size. This is for smaller projects. We have a grant program specifically focused on this. The funding opportunity notice was put out about two months ago. And so we are just beginning to get the applications and go through the concept plans and then invite them for full applications. What we've also noticed in addition to that is as larger leading edge fab manufacturers come onshore or set up their clusters. We have noticed that they're actually bringing their own suppliers and smaller businesses even from abroad, like from Taiwan, other parts of Asia to be onshored in the US for the first time, which is very helpful pattern. And it also opens up a funding and financing opportunity for a number of SBIC lenders as well as institutional investors. So the way the CHIPS program is structured right now is for the smaller business community. We have the grant program. In addition to that, we are working on developing partnerships with organizations such as yours SBA to figure out how we can leverage either existing pipes in terms of SBIC infrastructure or create new MOUs or partnership agreements with SBA to stimulate SBIC is coming in. Part of that would also include access to information and setting up a portal to connect lenders to potential suppliers and smaller applicants. And that's something that we are focused on building over time. And in addition we are open to hearing from the community. So if the community and your, your audience has additional inputs and avenues that they feel we should explore, we are all open for ideas and we are all in this together to solve this.

I think that's excellent. The private funds across the country as well as depository institutions that we work within our network can be very powerful and they are key stakeholders in this equation. So I am so excited about the broader ecosystem approach that is being taken and thank you for your leadership there Arjun. I'd love to hear a little bit about how you think about the opportunity from an investor perspective. So for investors to support an area such as of such national importance today, how are you considering the opportunity set for investment?

Thanks, Bailey. So as you know, investors go to attractive opportunities where they can target above market returns or above average returns. Right? That's the flow of capital. So the largest new area currently is artificial intelligence and it will require an entire new technology stack. It's actually a level playing field because so the CHIPS act has come at an opportune time because this we could catch up fairly quickly if that happened. So as you know, Nvidia now, which is a US company is 1.2 or 1.15 trillion. It's the first time a semiconductor company in the history of the planet has crossed a trillion dollars. There's only six or seven companies that have ever crossed a trillion dollars of market cap. The very next one down is about half a half a trillion. And that's TSMC which is the largest manufacturing. So you have fabless companies that design and then TSMC is a very large, high scale cutting edge manufacturer that can bring the products to market, which essentially is manufacturing. So when that happens, and especially now with the US has fallen back, so take an intel or amd, they've seen their market caps plunge. They've also seen gaps in their product line. That is where the beauty of Silicon Valley and the American economy comes in. Because you have young entrepreneurs starting new companies. Very often they'll do the design, bring it to market, but then a much larger company like intel or AMD would acquire that because they have the distribution channels, the installed base of customers, the support, et cetera, et cetera, et cetera. So I think the area is super attractive. Like I said, the two areas that are seeing the largest amount of investment going in is artificial intelligence and semiconductors. I think the design side of it will continue. The US will continue to lead. I'm glad to hear Shrutan explained the chips act and the specific numbers associated with keeping up R and D and design. I think the gap and the real challenge will be the manufacturing side and actually shooting. A little bit of unasked for advice, but there's a analogy with the auto industry from the past. We owned the auto industry, then it kind of disappeared to Japan and people said it was the end of American auto manufacturing and of course with Tesla and everything else is back. But really the critical time was when the US and EU went specifically to, excuse me, to Japan Inc. And said, off your volumes, if you want our markets, you have to do X amount onshore. And that's how I'm forgetting. But in the South, Toyota opened the big plants, et cetera, et cetera. So I think it behooves us to think of strategies like bringing TSMC back onshore for X amount of volume, together with the financial incentives. But Bailey, back to your question. I think it's a giant opportunity. M and A is coming back. The largest players realize the gaps in there. So kind of top down, it's a big opportunity. Because of the AI transition, the largest players like intel or AMD have fallen behind. They are looking to acquire, entrepreneurs are starting company and the whole cycle starts again.

It's so interesting to hear you talk about it. And if I can play it back, what I'm essentially hearing you say, right, is that we have tremendous growth and opportunity in AI, but in order for us to realize those advancements, we are literally constrained by how quickly we can move in terms of building out the semiconductor industry and our support for increasing data center capacity in this country. Because without that, we won't have the computing Power that is necessary to make the advancements in AI. Is that right?

Absolutely. Because as I was saying, they run on GPUs. Currently the only and the largest player in GPU is Nvidia. They have limited capacity. And so to grow that whole market you need new players coming in, bring new products to market. And by the way, some there are shovel ready projects which I think Shrujan, his team will soon see from the Valley where it's a whole new paradigm in computing which is what gives us the opportunity to catch up.

It's fascinating. Thank you for that. A question for both of you. What are the challenges faced by small businesses and startups that are seeking access to government funding? So you know, this is many of these businesses before have not not sought support from the government and when you're small, typically you don't do it right. So what are potential innovative ideas to solve for these challenges? But let's start with the challenges as you see it and then hopefully we can get to some ideas.

Sure, I'm happy to go first and Arjun can chime in as well. You know, in terms of financial incentives and having government support, I think we are in one of the best environments that we have seen in decades like industrial policy. The last we have embarked on such a big mission was, you know, probably at the end of or during the World War II. And since then this has been, you know, the first major industry policy intervention in the market. So from a government standpoint, across the loans, grants and also let's not forget the ITC, the tax benefits that are associated with Chipsac, cumulatively there is about, I would say 45 to 60% in terms of capex being spoken for across these three incentives on an average. So there's tremendous amount of financial support. Addition to that. What we have also seen is that customers like, to Arjun's point, most of the leading edge customers are US based. So Nvidia, Qualcomm, Apple, a number of customers, all of them are also looking at their supply chains and they realize the single point of failure that they have in their supply chains that are very concentrated in Asia and they also want some diversification of supply chain and onshoring is being viewed very positively there. So as a government organization we're also making efforts to activate the customers to get them into the mix in order to support this effort. But you know, going to the challenge part of your question, I think the major challenge in my view is going to be workforce because what you're seeing right now is yes, the company are willing to come forward, customers are willing to come forward to support government is more than willing to put forward incentives to motivate the build up and manufacturing base getting formed in the U.S. but the reality is that this industry is very intensive, both from a skilled labor perspective as well as ongoing innovation standpoint. So for that to actually survive and thrive in the US we need a very strong and vibrant workforce. And that's where I think the challenges will lie in years to come. And we have seen companies put forward innovative ideas as to how they'll solve it. But in my view that's still a big challenge.

I'm so glad you bring that up because I think about our audience today and do wonder if that is an area where entrepreneurial, support organizations, philanthropy, some of the tech hubs can be supportive of retooling, reskilling and training the workforce. And then points you brought up before about the need to move into more advanced manufacturing, additive manufacturing techniques as well to create more efficiency in terms of the use of the workforce and the speed in which we can be manufacturing. So it's really interesting and I do hope our audience thinks opines on that. But Arjun also would love to hear your perspective. If I have it right and you can correct me if I'm wrong. You were involved early days in Qualcomm and their go to market and back when it was a small company and you know, I think you have a great perspective there, but a perspective across so many companies.

So you know Qualcomm was only two people, Dr. Irvin Jacobs and Paul Paul Viterbi. And I think the planet had 6 billion people at the time. So there were two people and they pitched one person with the CTO of Pactel, his name was Greg Farrow and the industry standard was tdma time division multiplexing. So you took one analog channel and you divided into three digital channels. Well the Qualcomm guys are saying we can give you 20x analog so it's much more capacity and that if wireless becomes ubiquitous it's necessary. But in the broader point our little companies have to go through three stages at minimum. The first is product design, the second is initial market entry. The third is then scaling up of course an intel or amd, all the companies that Shrujan mentioned and Nvidia, Qualcomm, et cetera, they are mega players, they're beyond scale, they've got extraordinary footprints in terms of customers, et cetera. So Shrujan, my feedback would be that I hope you mentioned the grant program. Hopefully that's the right answer. But our little companies would literally, I hate to say this, but they literally die under the, the, the hassle of trying to go through application, you know, a detailed application process. So I was wondering if there was just as a, as a thought starter, maybe you guys could think about a accelerated program where you said, hey, 80% of the money has to be in the bank already. So let's say a semiconductor company, design company was starting, they're raising 25 million because, you know, you said the lowest number you use was 300 million. That's much, much larger than, let's say, you know, the startups getting there. So let's say, let's just use an example of 25 million. Let's say 80 has to come from private. So you, you could, you could consider a highly accelerated program which said, look, if you have 80% of the capital from private sources already, so you can leverage off that due diligence, etc, you can see the team, you can even check the quality of the sources of that capital. If there was some way to access those dollars quickly so that the company just doesn't die under the pressure of compliance and going through the application process. The average small company can't last a year or a year and a half to go through an application process. Right? It has to be more in terms of time, maybe 30, 60 or 90 days. In terms of capital, maybe you cap it below 10 million. But I would just encourage you to think about the lower end of the scale and hopefully a program and we'd be happy to help think it through with SBA and you a program that can get money faster to the most innovative smaller companies. And they'd also be much smaller check sizes. So therefore the risk is limited.

Interesting you say that.

Just to clarify a couple of things. One is the minimum size is not 300. What I mentioned is it's below 300. So minimum size could be 10 million as well. So the second notice of funding opportunity is focused on companies less than 300 million in size. So that's number one. Number two is absolutely agree with you in terms of the timeline and urgency in order to deploy capital. In fact, our top priority is to deploy capital as quickly as possible given the national economic sector concern, security concerns that we have. And so what we have done is, I mean, the typical turnaround time for us is actually far more accelerated than any other government program. You know, what you're seeing right now is from the point an applicant submits a pre application to, when feedback goes out, it's less than eight weeks from the time they submit a full application to when we are actually going to announce PMTs, which you already seen the first one come out this week. You're going to see many more come out in the, in the coming few weeks. That timeline is the fastest across any government program that I have personally seen the timeline from submission of full application. And our hands are tied because we need to have all the information that we need according to the statute to process. But once they do that, from that point to where the preliminary memorandum of terms gets announced, that timeline is less than eight weeks. And so we are moving at record space. In fact, the way we are running it is how a private equity or venture capital firm would turn around and put out term sheets and move the investment forward because we share the urgency along with the community. So that's number two and number three I would say is having said that, yes, it's still a government process. There's still a lot of applications and like, you know, requirements that you need to satisfy. So we recognize that and we are cognizant of that. And our goal has been to make it as smooth as possible to the community. And you know, we've been actively engaged in talking to all the applicants about this. What we are doing for the smaller businesses is we have simplified the process and introduced instead of a pre application and all the steps we had for the larger applicants, we have a simple concept plan that they need to submit. It's much more quicker for them to actually go through it and get feedback very quickly. And the process is very agile. And so we have stripped down a number of requirements for the smaller applicants which are projects less than 300 million in size, specifically with the view of being quick and being simple and being agile.

Thank you.

Open to your thoughts anyways. But you know, all ideas are welcome but you know, happy to hear any other suggestions you may have.

Thank you.

Well, Surajan, I must say, I mean the administration, we are so fortunate to have you with your private sector experience in this role at this critical time and your deep appreciation for the fact that time is often your most precious asset when you are trying to get access to funding. And so you want to be very intentional about where you are investing your time and resources. But I think these are just tremendous ideas. So excited about the potential. It's an amazing team that you have built and that you're working alongside and excited about the whole government approach and the opportunities to collaborate around the mission, particularly where we overlap in terms of our support for small businesses and startups and also many incredible funds that we partner with that work every day to get capital out to to us small businesses and startups. So thank you so much. And Arjun, your perspective has been excellent and deeply appreciated. I hope this is the start of a longer conversation, but I am thrilled that we were able to bring this to the community today. And thank you so much to my incredible team. It's an honor to work with them every day. So Brittany and Jennifer, I will hand it back over to you. All right, thank you so much. Bailey, Arjun Srujan, for that insightful discussion. Let's give them an emoji or gift round of applause and thank you all for being here today at the third annual SBA Innovation Ecosystem Summit. Don't forget to share your light bulb moments with us on social media using the hashtag ESO Summit 2023 and see the future. We're going to take a quick break. We'll be back on at 1:05pm Eastern for our next panel, the impact of COVID recovery programs on local innovation ecosystems. Stay tuned.