In San Jose (CA), we meet Co-Founder, President & CEO of eSilicon, Jack Harding. Jack talks about his story how he came up with the idea and founded eSilicon, how the current business model works, as well as he provides some advice for young entrepreneurs.

INTRODUCTION

Martin: Hi today we are in San Jose at the eSilicon Office. Hi Jack, who are you? And what do you do?

Jack: Martin thanks for having me on board here. Jack Harding, I’m president and CEO of eSilicon, I’m also co-founder. We started the business about 15 years ago and the vision was to put the semiconductor development process on to the internet. We discovered early on that we had some major challenges there. We stuck with some of that business plan but some of it we put on the back shelf. Interestingly, things have changed for the better in the recent years in terms of availability of technology, information flow and we’ve now made a major commitment to put our business back onto the internet and we’re making great strides. So it’s an interesting back to the future strategy for us.

Fundamentally, we make custom chips where general contractor if you like, to make one of the world’s most complex chips for the world’s largest system companies and we’re among a handful of people that do what we do, we compete mostly with major corporations, about only about two or three. And we’ve carved out a very very nice niche market for a small company and we find ourselves that the combination with the internet emphasis and our core competency moving forward aggressively and with a great success these days.

Martin: What is your background and how did it prepare you for starting your own business?

Jack: Out of my 36 year career, I’ve been a startup for 30 years and so I have a strong pension for working with the new ideas. I think of myself as a builder, I like to think about the future and just find those gaps in the market that I can exploit with a solid business plan.

However, I didn’t start that way. My first job was at IBM which was the opposite of a startup. It was a wonderful training ground but after several years I decided that my place was in a small company, I was trying to invent markets in businesses as oposed to executing establishments.

Martin: Great and how did you come up with the business idea for eSilicon and did it change a little bit you?

Jack: Part one of your question is: I was a president of a startup company about 20 years ago, a software company here in Silicon Valley and it was acquired by much larger company Cadence Designs Systems, a large software company that’s electronic design animation. And after a few courses I became a CEO of that company and I was there as CEO. And from that perch I was able to see a lot of the trends in the industry. I was convinced that the industry was going to move to less capital investment, more automation, more internet access and a much more fluid flexible model. And I realized that to get that done, I had to be in a brand new company.

So I put together a team of trusted allies who I worked with for any years and we started this company and raised about a hundred million dollars in the first four years. We started a whole new industry segment called the fabulous custom chip segment. All great ideas when you’re an entrepreneur, if ever one calls you up and said, “This is the worst idea I’ve ever heard” then you know you’re on to something unique, they like it because someone else is doing it. We carved out that part of the market and within four years, virtually 80% of our competitors large and small had taken on our business model. And it’s that model that we pursue today.

Part two of your question is a strategic change, fundamentally no. We’ve had to adjust the strategy to economic conditions we’ve weathered a couple recessions here, globally. We’ve had different times of financial success or other times we’ve had to be very frugal. But we fundamentally outstate the course just constantly enhancing our differentiation and our go to market strategy but I can tell you the idea is a basically the same.

Martin: Okay cool. Jack, in the beginning when you said that you raised 100 million in 4 years, how did you convinced investors that fast to give you that much money?

Jack: It’s a couple things. First of all, when you’re out raising money, the team makes a big difference. I put together a world class team of executives both technically and commercially and that went a long way to getting people’s attention. But secondly you have to remember, when we start the business it was right around 2000 and leading into it 1999-2000, it was the internet craze and people we’re actually taking business plans to an IPO. Raising money was probably easier then than any time of the history. So we benefitted from the very liberal flow of other people’s money, as you call it into our business. But then we had got some very early traction. And an important attribute of being successful as an entrepreneur is getting at first of what we call a ‘Hit Record’ when you surprise people with a big account or some big success in the market. And we had a couple early successes and that gave our existing investors and then subsequent investors a lot of confidence in us.

BUSINESS MODEL OF eSILICON

Martin: Let’s talk about the business model. What differentiates you in terms of the product from your competitors?

Jack: Well, as I mentioned, we make customized chips. In other words, if you were my customer and you come and say, “Here is my functional design, my ideas for building this chip.” Now I need someone to get it ready for the manufacturing by doing the physical design connecting all the transistors and then putting it into the supply chain and managing before its live, which is in my opinion were from two years to 20 years long. To get that done, differentiation comes in many forms. Some of them comes in the form of intellectual property for which we have a very substantial portfolio. Secondly, it comes from the design methodology which produces a reliable result.

But in our case, it came from two other factors. But unlike our much larger competitors, who have a single recipe to make a customized chip they kind of throw everything into their funnel then the chip reliably comes out the back and they do a good job. Our strategy was different. We said to our customers, “We will work with any combination of any supplier anywhere in the world to optimize your chip, not just to get it to work, but to make it completely optimal and give you all the boundless and limitless choices of every source of intellectual property in the world and every process technology and every package technology”. And then to manage that complexity, be a lot of us having come from the software industry for design automation, we automated the entire infrastructure of our business so that we have software tools helping us to make those decisions and providing that flexibility to our customers.

So as they develop confidence in all the permutations we would allow them to choose from, our differentiation became simply, “Tell us exactly what you want get done and we have the software tools that will tell you that the recipe to optimize that” and that’s how we work today.

Martin: So this basically would mean that you are in the mass customization business and others are as well, but your differentiation is that you are trying to optimize the mass customization?

Jack: We are optimizing the production of the actual chip and we are also doing it by providing infinitely more information during the architectural phase so that people can make informed decisions about what they want their chip to do; do they want to focus on power consumption, or the performance of the chip, or the area of it which is a proxy for the cost.

We have the ability to let them pick and choose and so for those outcomes and by doing so they can build exactly what they want and know that when it does come out of the factory it will work as they had hoped.

Martin: You said before that you wanted to connect the semiconductor business and the Internet, so to speak. How are you using the Internet for delivering this kind of available position?

Jack: Well, first of all, all the tools we use internally are available over the Internet for our own employees and we make those readily available to engineers all over the world. We have people literally around the globe. And that’s very helpful, great efficiency.

But the last two years we tried something different, we had a set of tools we thought where particularly valuable to us and in the spirit of the Internet so what if we put those tools out there for free and gave people access to doing things like test chips or production releases into manufacturing with 100% automation. We’ve had remarkable response. And it’s our business in this industry even though we make all the technology that’s the backbone of the Internet, we are not very big users of the Internet commercially so we thought we would reverse that trend.

And so if you fast-forward to today, we have engineers in over 50 countries around the world using our free tools and we haven’t met two-thirds of them, maybe 80% of them haven’t met, we haven’t even been into half their countries but yet people are using the products. And in the last year we have had the amazing circumstance for when we give the people the option of buying from us, they don’t have to, we will send them the tactical work sheet, we will send them a contract they can sign, about once a quarter someone actually signs the contract, sends us a purchase order with a check for at least small test chips maybe $100,000 and we have never met them. So we are doing $100,000 transactions over the Internet with strangers with doing one of the hardest technical tasks in the world.

And so this as a consumer gives me great hope of what the future looks like for all of us when it comes to the Internet; just won’t be Amazon, or finding directions, or doing a search, people will be doing world-class engineering over the Internet among strangers. And for us of course, we still have to prove the financial viability of our investments but the early returns are very exciting and as an entrepreneur it’s what I live for.

Martin: So, when I look at the product portfolio besides those kinds of mass customized chips, what else could you offer which is also related to this? Because most of the companies are at some point starting with one product category and then based on the core skills that they generated they extend to another product category.

Jack: Good question, Martin. If you think about the architecture of a chip (we would not get too technical here) about half of the chip is memory – just memory. And the memory people usually select from suppliers kind of, as we say off-the-shelf. They get a memory that fits the chip approximately and is good enough. We have about 250 people who make customized memories, so part of our new product line and our associated differentiation is our intellectual property business. So when we built a chip for somebody, we asked them once again, “What are your goals for that chip? Can we model it on our software that we’ve developed?” Then we solve for what the perfect memory would look like. And then we build that memory, we design that memory for our customers and so instead of having a memory that’s close enough, they get the exact number that they need. And by doing so we can increase the performance, we can reduce the power or we can reduce the size of the memory therefore lower the price.

So people like that particularly as chips are getting larger and larger, and denser and denser. If you can save 5% of the power consumption or 10% of the area or the cost, that’s a huge savings for the market place.

Martin: Jack, let’s talk about your customers. What type of customers sequence are you serving? And when you added other product categories, did you extend this kind of customer segments or did you try to serve the same customer segments?

Jack: So our customer base has evolved over the years. In the early days, about half of our customers were other startups. The semiconductor business was investing very heavily. The semiconductor industry was investing very heavily to startups and venture capital available was astonishing, billions of dollars. And a lot of startups would popped up everywhere, and about half of our customers are name-brand people that you would know, the big logo guys.

Over time, that shifted. The number of startups in the semiconductor world has reduced dramatically and as the funds for investing amounts has shrunk in fact there is a major consolidation taking place. So, even some of our medium-sized customers are now becoming huge customers combined. I’d say today 80 to 90% of all customers are name-brand household corporations. And these are the people that make computers, they make routers and switches. We have customers into consumer products that make hearing aids. Our customers have made virtually everything under the sun; industrial products, medical products, automotive and it’s been a wide range so the technology that we serve has been a very broad spectrum, the type of customer which you asked about has shrunk down to the big household names.

Martin: How did you acquire the first customers? Imagine, you just started out your first iteration of your processes the younger Jack went out to some customers and tried to close the deal?

Jack: I will never forget. As a matter of fact, if you don’t forget your first girlfriend, you won’t forget your first customer. A tiny little company that was actually based in India approached us and they were going to make a machine that was going to accelerate the number of Internet transactions that could take place this is back and take say 2000-2001. And I remember the entire negotiation took about one hour, contract and all, because they were small company looking for help and we’re a small company anxious to sign somebody up and we did. We thought we are on our way now. That actually served to help us not at all because they were so small and we were too.

We then came across a division of one of the world’s largest companies called us up here in Silicon Valley and we knew some of the engineers who knew us personally, back to that personal connection that hit record if you will. They called us up and said, “We know your team, we know their reputation, and we’re looking for someone to help make this chip for us. Could you give us a hand?” We said, “We know you are new but we know your people from other companies and we’ve worked with you other times before and we’re willing to sign you up.” And that was our hit record. And after that, that name-brand account was enough for everyone else to hear that if they will buy from you then we will too and then we were on our way.

And about every other year thereafter we pretty much had another hit record account that just accelerated our growth and our credibility. I often talk to other entrepreneurs about this phase of growth and I refer to it as getting lucky and not lucky in the sense of random events but position yourself to exploit a good opportunity that comes your way that was not predictable. So we’ve always been very conscious about making sure that when that phone call came from that big guy that we thought we couldn’t sell to otherwise that we were ready to go that we had the materials to present that we had the people who can articulate our value and that and we can at least give the perception that image of a more successful larger company.

And a lot of great companies fail with great business plans, lots of money, great people and big markets because they are not prepared for that phone call when it happens and that one in a lifetime chance just goes right by without them responding. So we are always very cognizant of that having many of us had been in our second, third and fourth startup and we are always ready to look big event if we weren’t.

Martin: What are the major obstacles over the 15-16 years besides the crisis like financial crisis like bubble burst and financial crisis? And how did you try to cope with it?

Jack: You mentioned the big ones and of course they are true for everybody. Even though they are somewhat predictable, it’s how you respond is of great importance.

But I think single obstacles that we had were not anticipating how quickly our major competitors who are using their own major factories and their own capital investments abandoned all their capital and came to our business model. It seems like overnight we are competing with some of the largest and best companies in the world and the electronic space and that caught us off guard.

In fact, we were discussing in the other day, the first seven years of the business we enjoyed sort of unfettered access to the market we were different we were fresh and new and we were very nimble. In the second phase of our growth, the second five years we found ourselves being bombarded by major corporations who actually picked up our flexibility and the nimbleness and we just didn’t have the brand or the cash with which to compete. I think that our response to that was to just double down our efforts on building differentiation. That’s how we got into the intellectual property business we said, “We need something that’s special and different not easily duplicated that people say we need to deal with eSilicon for these reasons”.

So it’s been in the last 5 to 7 years we’ve enjoyed that positioning. We also recognizes the complexity was growing that we would have to accelerate the development of our own internal automated tools to manage the complexity and that’s playing great defense today. So we responded quickly but in this business responding quickly means maybe 3 to 4 years. You can’t turn on the proverbial dime.

So now we’re enjoying all the investment but we did go through a period where I felt looking back today, we’re quite flat we saw what we had to do and we did it and in summing up to terms we did it quickly but it was a challenging period.

Martin: Jack, you said you didn’t expect your competitors to change up their business so quickly. How did it really take in terms of years? And why do you think it was that quickly? Because most of the Startups think “Oh the old guys, they will never change, like maybe 15 years but until then I’m big.” What was your expectation?

Jack: First of all, the companies that had the factories (the big guys, so to speak), they are all excellent firms well-run and very nimble strategically and as big companies would probably move faster than other big companies, so to speak. We guessed wrong because of the billions of dollars that they had invested in their facilities. What I think, looking backward I miscalculated, wasn’t their commitment to what they already spent but their loathing of having to spend again to stay current. So if they had spent $2 billion dollars to build the infrastructure they were using their going to have to spend 4 billion to keep it current. When they face that next check to write they look around and said, “Look these are those small companies are here being successful without all this infrastructure we can do it too.”

I kept thinking about what they had spent not versus what they were about to spend. And that’s what accelerated their transition to our model and caused them jettison their infrastructure very quickly.

ADVICE TO ENTREPRENEURS FROM JACK HARDING

Martin: Let’s talk about your advice to entrepreneurs because I heard that you are talking in many conferences, about the startup life, what has been the major learning over the years for you?

Jack: If you’re doing it for money, don’t bother! Because on a risk-adjusted present-value basis being an entrepreneur is very low probability of making money. We all hear about that billion dollar scores and the people that had fantastic returns, they are measured in fractions of a person per thousand. The vast majority of startups fail and the ones that don’t fail, the vast majority of the those never have a return, particularly to the entrepreneurs.

So you have to be an entrepreneur for the love of it and you have to make that decision early on. I have seen a lot of people chased the one-in-million return and it’s like hitting a home run in the world series so I can do too I’m going to play baseball hole-in-one at the PGA, “Oh I would take up golf but it’s not hard.” And I have come to learn also that being an entrepreneur isn’t something you do it is a state of mind, it’s being highly tolerant of ambiguity, of being uncertain about the decisions you’re making, it’s being comfortable with a contrarian view that you must take in order to create new market otherwise someone would be there already. And you can’t follow someone is in the land of startups because by definition they’re there.

So you also have to be somewhat comfortable anticipating or predicting other complementary innovations that will make your life easier. If you think about you can take the road on the highway to get from point A to point B but you know it’s much shorter if you drive across through the woods and you’ve got to hope that when you get to the river the someone has built a bridge. So entrepreneurs thinking in terms of, “I’ve heard someone’s going to build a bridge or it makes sense they build a bridge there and I know a guy who’s investing building a bridge. It’s not there yet but I’m going to cut across to the woods and beat my competitors on the highway because it’s a much shorter drive.” And the question is when you get there what if is the bridge isn’t there? Do you say okay we’re done? It’s a very viable decision that the entrepreneurs used to say, “This will fail let’s start again”, and we’ll will get back to failure in a moment or you say, “Okay, it turns out the bridge was a half mile down the road.” And then you organize your team and you travel down the river for a half mile while there is a bridge it was later than you thought but you got there anyway.

These vagaries and uncertainties have to be part of something that the delight you as a human that doesn’t stress you and that you have this fundamental belief that you can adapt in times of business trauma. So it’s a mindset that really has to be present such a skill set per se.

I mentioned I want to get back to the subject of failure. I talk a lot about entrepreneurship in Europe and invariably someone in the audience raises their hand and says, “You know you guys are in Silicon Valley if you screw up and your company fails you’re even more valuable because you know what not to do the next time, over here in Europe if we screw up we’re ruined.” So, a big variable is to work in a culture that doesn’t deem failure to be the end of your value to society or to the industry. You need to start your business in an ecosystem where failure is seen as experience that can be exploited in the future.

To me that’s— you can do everything right and working in an ecosystem or a culture that the first time you have a setback your investors or stakeholders pull the plug. It is impossible to win that way. One of my investors said to me early on that his job was to do two things; to decide every quarter if I should keep my job and then make sure I never run out of money. As long as I kept my job his job is to make sure that I always have money. He led the hundred million dollars in the first four years because we continued to show promise and we continued to give evidence that the market was coming our way.

It’s hard to find people outside of the Silicon Valley that will have forward-looking view and give you the space you need to fail and recover and get back in the game. So I always counseled people to be careful not just what you startup and what the expectation but where you startup so that you have people who understand that it’s a high-risk endeavor and you may not make it on the first pass.

Martin: Jack, what other types of learnings have you have learned along the way?

Jack: This is not unique to being a startup but it’s all about the people. I have invested in companies that have great products and okay people. But if the product comes out and if misses the market by 10% one way or the other, it’s over. Great people will bring out a product and if they missed the market by 10% they’ll adjust and get it again and again.

Many, many, many startups even changed their strategy even if their entire business model as they evolve. Great people will make those decisions of the company where there are great products if unless they hit the bulls eye, will take you under. And so it’s all about the team and I know this sounds trite but I’ve proven it over and over again. Whatever I made a decision based on something anything other than the quality of the person with whom I want work with it’s been a mistake. I would have held to my guns about who I want to bring into a company to win based on their success, their knowledge, their character, their willingness to live in an ambiguous environment with lots of uncertainty is always a great dividends. So that’s a key variable as well.

Martin: Jack, thank you so much for your time and sharing your knowledge.

Jack: My pleasure, I appreciate it.

Martin: And next time you are thinking about starting a company, think about what type of ecosystem you will start because you will need lots of support along the way and people who will back you up. Thanks!

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