Business 101: Sustainable EDA

Dr. Lauro Rizzatti, Vice President of Marketing and General Manager of EVE-USA, has 30+ years' experience in EDA and test. Prior to EVE, Rizzatti held positions at Get2Chip, Synopsys, Mentor Graphics, Teradyne, Alcaltel, and Italtel. His Ph.D. is from the Universita` degli Studi di Trieste

Here in the next installment of the Business 101 Series, hosted on GABEonEDA, Dr. Rizzatti speaks candidly about the realities and challenges of creating a sustainable business model in the EDA enterprise.

* Q – This is a big year for EVE.

* Lauro Rizzatti – Yes, this is the 10th anniversary of EVE!

If you had asked me 7 or 8 years ago if we would be in business even one year later, let alone in 10 years later, I would not have been sure – but here we are! Based on our experience, we are sustaining ourselves.

In these 10 years, we have had in 3 investment rounds – the equivalent of $14 million in Euros – and now reached the point where we can sustain ourselves with our revenue. It's not a big profit yet, but we're definitely in business.

It would be nice to have more cash in the bank, because we could do many more things, including internal development of complementary technologies, and possibly some mergers or acquisitions of businesses complementary to what we do. Currently, however, that's not possible.

There is good news from our perspective, however. The recession seems to be over. On a worldwide basis, we see activity in Asia and Europe that we were not seeing a year ago. In fact, we've just closed a record quarter in terms of bookings – absolutely a record!

* Q – Does the company have a recipe for success?

* Lauro Rizzatti – I don't know that we have a recipe that we can share with the world, but we have been very focused from the beginning which has certainly contributed to our success. Of course, you can fail even if you are focused!

We did opportunities in the past to be distracted on more than one occasion -- to merge or acquire other companies -- but keeping our focus was the right thing to do.

We did acquire Tharas Systems in 2007, although our investors were reluctant. They were concerned that we would de-focus with the acquisition, but we prevailed and did the thing because we use a portion of their technology in our work. It was an acquisition of complementary technology.

* Q – How would you define a sustainable business model, even if there's no recipe?

* Lauro Rizzatti – In my mind, it's having the financial resources to stay in business. If you don't have that, I don't know what to say except you better have a white knight!

* Q – If the common wisdom says the only exit available today is acquisition, does a company really need a sustainable model?

* Lauro Rizzatti – In EDA there are 3 possibilities: You go IPO -- certainly in the old days, that was the case, although I see less of that today. At the other extreme, you run out of cash and you die.

Or the company can be acquired by one of the three leading EDA companies.

And then, there's a merger with a company that is more or less the size of yours; 1+1 makes 3 with complementary technologies.

* Q – Is it such a bad thing that being acquired is a critical part of the EDA landscape today?

* Lauro Rizzatti – It depends on the conditions of the acquisitions. Some time ago, you took your revenues, multiplied by 10, and that was the valuation for acquisition. Sometimes the multiplier was as high as 100.

If you remember – Synopsys made an offer for MoSys of more than $400 million in 2004. There have been a few other instances like that, when 10x was the rule, but that's not the case anymore.

Now I hear it may be 4x revenues, or sometimes even as low as 2x. Even at 2x, however, you might want to consider the offer. It all depends on your financial condition. If you think you can continue to grow, you refuse the offer. But at 4x, you really have to think very hard before walking away.

* Q – How could things have changed so radically? Why didn't people in the 1990's see that overpaying for a company was a bad idea?

* Lauro Rizzatti – Those were the good days, when small companies could get $100 million funding just for having a good idea.

* Q – How could it have ever been a good idea to waste money?

* Lauro Rizzatti – Of course, it was stupid. I remember talking to non-EDA people at the time who were also not dot-com; people in Europe just couldn't believe it. They were saying, this is totally idiotic, and they were right. There was a lot of money [wasted] in those years.

* Q – Are we now at the other extreme, with people underpaying for companies?

* Lauro Rizzatti – Yes, I tend to agree with that. It's definitely a buyer's time right now for people who want to acquired companies.

* Q – Doesn't the pendulum always swing on these things?

* Lauro Rizzatti – EDA will never go back to the good-old days. I can't see Synopsys, for example, ever again offering to buy a company for 100x revenues.

* Q – If IPO is not a possibility, and failing is unpleasant and unwanted, again the only exit is acquisition?

* Lauro Rizzatti – Yes, or merge with someone else. There are still mergers that would create good synergy.

But, yes -- acquisition by a bigger company is the most plausible outcome. Of course, there is always the clash of corporate cultures in that case. The synergy between two companies is never that easy.

* Q – What happens when a big company acquires a small company?

* Lauro Rizzatti – If they need your technology, you'll always want to believe that they'll retain the R&D people, or at least most of them – the scientists, the engineers. You want to believe the big company will continue to produce your tool and integrate it in with their tools, but that's always very hard.

* Q – How does the acquiring company make the people in the acquired company feel appreciated?

* Lauro Rizzatti – It's not easy. At the moment of the Tharas acquisition, 14 Tharas people came on board. Within a few months, 2 or 3 people elected to leave, but we have retained 9 people and I think for them it's gone well.

Remember, however, EVE is a small company. We see and talk to everyone everyday, including the people who were with Tharas, It's a family.

* Q – How does a small company resist a hostile take-over?

Lauro Rizzatti – One reason a big company takes over a small company is because they're interested in the technology. The other is because they want to kill the technology. Either way, it's hard to resist a hostile offer because money talks.
* Q – It seems like a big waste of money to buy a company just to extinguish the technology.

* Lauro Rizzatti – Yes, but look at the [recent trend] on Wall Street, the betting – putting together something to promote, and then making money when it fails.

The technology sector does not benefit [from this strategy], but if a big company can do it by buying a small company, they'll do it. Yes, it's stupid!

* Q – Given the various pressures, how do you stay focused on next year, let alone 5 years out?

* Lauro Rizzatti – Fundamentally, you need to sustain yourself financially, either with your own money or with local investors.

In the early days, I thought having Silicon Valley VCs would be the best [strategy], but years later I realized that European VCs are far more relaxed and not as pushy.

* Q – The only venture capital is local venture capital?

* Lauro Rizzatti – Definitely, I would agree with that. Over time, it's best when you develop close relationships with your investors. I know all of our investors personally and meet with them regularly, often over lunch.

* Q – Do you think there's an upper limit to how many major players can be in a tech niche?

* Lauro Rizzatti – I think even 4 or 5 players is too many, [which means] the situation is not sustainable in EDA. There have been rumors for years, for instance, that one of the Big Guys would buy Magma, and that still might work. But there's no room for 5 major players in EDA, or even 4.

* Q – Should a young technologist consider coming into EDA, given that it's a mature industry?

* Lauro Rizzatti – I have mixed feelings. If it were my son or daughter, I would have a hard time making that recommendation. I would only do it, if what we do in EDA is of general interest to the young student and not because they wanted to make money.

Don't come into EDA if you're looking for money!

* Q – What's the EDA industry going to look like in 20 years?

* Lauro Rizzatti – I can't predict out 20 years, but out 5 years I might [make a prediction].

If the world were to freeze over as we are today, EDA would boil down to 1, or maybe 2 companies in 5 years, and they would probably be Synopsys and Mentor. Everybody else would disappear, and there would be no need for new tools.

The reality, however, is that we do need new tools. But the big companies aren't able to innovate as well as small companies, so for the next 5 years EDA will continue to exist. After 10 years, however, it may radically change.

* Q – I often hear that Intel and IBM are doing internal innovation, but they're not small companies.

* Lauro Rizzatti – Yes, that's true and you can add HP to that list, along with other large companies. But, when we say EDA is not innovating, it's Mentor, Cadence, and Synopsys we're talking about. Although there are a few exception, these companies buy innovation through acquisition.

* Q – But Intel and IBM are huge, far larger than Mentor, Synopsys, or Cadence!

* Lauro Rizzatti – Yes, but Intel and IBM throw so much money at their internal R&D, even if the ROI is very poor, they have an economy of scale to absorb [the expense].

* Q – Perhaps Intel will buy Synopsys?

* Lauro Rizzatti – [Laughing] Well, they bought Wind River, which was a big surprise. Anything's possible!

* Q – That's not necessarily good news?

* Lauro Rizzatti – Perhaps not, but it's the reality.