Charlie Cheng, Chief Executive Officer, Kilopass Technologies Inc.

It took two high-profile acquisitions in mid 2010 to make the semiconductor IP market segment hot again, an outlook that will continue now and well into 2011. In fact, I predict that the U.S. semiconductor business model will be transformed from fabless companies designing chips and building them off-shore to a model where they will license their core technologies to larger semiconductor companies that have already perfected the process.

It makes sound business sense when the cost to fund a chip start-up ranges from $50-$100 million over an 18-month period or longer. Consequently, few start-ups get funded or attract top talent. Instead, start-ups and emerging companies will realign their businesses on delivering their core technologies as a small portion of the chip design. Examples of established companies successfully implementing this model include ARM, Rambus and Tessera, while emerging companies such as Kilopass are licensing their technologies to semiconductor companies worldwide with equal success.

The model, popular in the mid-1990, was not a business or financial success. The reassessment of this business model is due in large measure to the acquisitions made in mid 2010 by EDA vendors Cadence and Synopsys, each of whom paid premiums to acquire companies that license semiconductor IP. Cadence paid $270 million to acquire Denali Software, a DRAM IP supplier. Synopsys acquired Virage Logic, an embedded memory IP company, for $315 million. Suddenly, the semiconductor IP model looks appealing, viable and remarkably sound.

This business model is cost effective and efficient as well. Funding a start-up focused on its core technologies is a fraction of what it takes to fund a full-scale semiconductor chip company from initial founding to profitability.

And suddenly, the close to 500 private semiconductor companies - by my count - with a patent portfolio have bright futures, where previously, they little chance of closing the $100 million round of funding needed to get product to market. Reinventing themselves as semiconductor IP suppliers is the way to make an impact on the market and a return to stakeholders. Denali and Virage Logic have proven that it’s possible.

It’s a strange dichotomy: While the semiconductor industry is a leading indicator of the recovering economy, with projected growth between 10-15% for 2010-2012, it’s all but ignored by venture capitalists, talented employees and media outlets. That’s about to change with companies moving to the semiconductor IP model, offering a favorable impact on the technology landscape in 2011. This should be welcome news to the entire semiconductor industry.