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A Q&A with IQT’s microelectronics investment and technical experts exploring IQT’s activity in the space.
Why has IQT chosen microelectronics as a strategic investment area?
Microelectronics are critical to both national security and broader economic competitiveness. Semiconductors are found in everything from cellphones to medical devices and from weapons systems to navigation devices. IQT firmly believes that the key to crafting the microelectronics of tomorrow resides in locating, financing, and developing the necessary tools today. It is a core principle that has driven our investment in the microelectronics field for nearly 20 years, leading to over 75 successful deals and making us one of the most active investors in the field. We began by focusing on areas such as RF wireless technology and Bluetooth, moved to investing in hardware related to AI and other applications, and are now supporting a new generation of startups developing innovative tools and techniques for building chips.
What are the key drivers of your investment strategy in the field?
That can be summarized in a few key words: disrupt, protect, and generate insights. When we say disruption, we’re talking about investing in technologies that can fundamentally change the way the United States and its allies produce electronics—and especially ones that can help us break free from bottlenecks and dependencies associated with key microelectronics supply chains.
Protection refers to our efforts to help nurture and develop startup companies for our government partners and allies that ensure they have access to critical technological capabilities for national security needs.
And generate insights refers to the knowledge we develop via our many investments, which helps our partners develop an even deeper understanding of the microelectronics landscape and key developments within it. This also powers a beneficial flywheel effect: the more insights we develop, the better we get at identifying and investing in disruptive innovations and companies, who in turn provide us with yet more valuable insights.
Which major trends have helped shape today’s microelectronics industry?
Perhaps the most notable one is Moore’s law, which refers to the fact that for more than half a century the number of transistors that can be packed on a similar-sized chip has been doubling roughly every couple of years—effectively doubling compute power without significantly increasing chips’ cost. This trend has functioned like clockwork, but it’s coming to an end—if it hasn’t already expired—because of limitations associated with shrinking circuits down to the atomic level. Now we must deal with its legacy: because people were so used to compute capacity growing steadily, there hasn’t been sufficient investment in new manufacturing technologies and tools.
There’s also the offshoring of U.S. production capacity. Long-term economic trends have led to much microelectronics fabrication capacity migrating outside the U.S., principally to Taiwan and some other countries. This has degraded domestic manufacturing capacity and created significant supply chain vulnerabilities, which we saw during the COVID-19 pandemic with shortages of chips for everything from vehicles to refrigerators. While recent incentive plans such as the 2022 CHIPS and Science Act will shift more microelectronics production onshore, which is to be welcomed, these facilities will primarily be focused on near- and medium-term capabilities and will mainly target large and mid-sized companies. That won’t be enough to help the U.S. regain a dominant position in microelectronics manufacturing in the future.
So how can America better prepare itself for the future here?
There’s been an upward trend in semiconductor investment over the past five years fueled by AI—and that’s highlighted the importance of having what you might call a perfect symphony of researchers, designers, and manufacturers working in harmony. But we’re still reliant on a handful of very large companies for significant innovation. We need more innovative young startups exploring new ways to manufacture chips. In particular, we strongly believe that the key to crafting the transistors of tomorrow lies in locating, financing, and developing the necessary innovative tools today. IQT conducted a survey of several thousand venture capital deals in the information and communications sector between 2017 and 2022 and found that 451 were semiconductor-related. But only seven percent of those 451 deals were dedicated to semiconductor tools. We’ve really let our chip-manufacturing muscles atrophy.
Can you share some examples of technologies that could help here?
Certainly. One example is the use of chiplets, which are small silicon modules that make it possible to combine best-in-breed circuit designs from different manufacturers on a single chip that is more capable than a traditional monolithic one. And this is not limited to just silicon–we will one day be easily mixing and matching circuit blocks using completely different materials as well.
Another example is the application of photonics, or light-based electronics, rather than traditional copper wires to move information inside and between semiconductors, and even between servers in data centers. This approach was pioneered in the telecoms industry, which uses photonic devices for long-haul communications, and it's been modified for much smaller distances, Photonic interconnects can reduce both latency and cost at the same time.
IQT has invested in a startup called Ayar Labs that is developing high-speed chip-to-chip optical interconnects targeting transmission distances from less than a millimeter to 30 meters and beyond. It’s these kinds of innovations that will enable computing to keep advancing in a post-Moore’s-law world.
Our portfolio companies have demonstrated their impact in a variety of ways, including by demonstrating IQT's ability to "crowd in" private investment capital in underfunded semiconductor tooling capabilities, engagement and participation in CHIPS ACT programs, and providing government partners an insider’s perspective on key market trends.
How should the United States think about reducing the strategic risk posed by key dependencies in the global chip supply chain?
That’s a multi-faceted challenge–and, as we mentioned earlier, it’s going to take time to onshore manufacturing capacity and to rethink international trading relationships in ways that collectively strengthen the access America and its allies have to advanced microelectronics. There are plenty of steps we can and should take. For instance, we can diversify the kind of materials we use. Startups are already developing chips using materials such as gallium nitride or silicon carbide that could lead to semiconductors with more power and the ability to handle higher-frequency operations. IQT has invested in a company called Finwave Semiconductor, which is developing a gallium nitride-on-silicon fabrication process for high-speed, multi-gigahertz RF switches and power amplifiers.
We also need to look for new ways to solve bottlenecks in supply chains, such as in the field of extreme ultraviolet (EUV) lithography, which uses laser-generated light collected by ultra-flat mirrors to trace circuit designs onto wafers. Today, only one company in the world, based in the Netherlands, produces machines costing hundreds of millions of dollars for this process.
You touched on the national security applications of microelectronics early on. How will everything we’ve just discussed impact this domain in the future?
As we said earlier, microelectronics is crucial to many different defense and national security areas. Highly capable semiconductors and software will be needed to control autonomous drones and drone swarms, to power advanced AI applications that provide the intelligence community with impactful analytic capabilities and decision-advantage, and for the sensors that will help us sense and navigate the world around us. IQT’s Global Security Investing strategy means we’re focused on identifying disruptive startups and technologies around the world that help our government partners ensure America maintains leadership in key security domains. Microelectronics has been a very important focus for us since our inception and will continue to be one in the years ahead. IQT firmly believes that a strategic investment approach that brings together both public and private sector stakeholders is the only way to secure U.S. microelectronics leadership.
For more insight into IQT’s involvement with microelectronics, check out our accompanying podcast available on all podcast platforms!