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Why America is losing on semiconductors.

We’ve heard a lot about Semiconductors in the last few years. They’ve become important in the public eye as the tech industry has overwhelmingly contributed to most of the stock market gains since Covid began.

They’ve also become important because they’re actually…really important.

Semiconductors are the bedrock of all technological innovation. You’ve heard that empires only became empires because they had better technology? That technology right now is semiconductors. Without a solid base of investment, production, and innovation around this fancy word, a global power can’t possibly vie to stay a global power.

Let’s hit the ad and talk about why…

Semiconductors: boring but essential

Chipmaking is not glamorous industry by any means. It’s arduous to innovate, expensive as hell to produce, and the biggest companies that are good at it have a terrible working culture.

But if you get it right, it’s a license to print money. But again, the failure rate is…really high.

And the country that rewards failure the most is the US. Failed startup founders can be rewarded again and again in this country. So it makes sense that the US would be a breeding ground for a high risk business  such as a semiconductor fabrication company, right?

Nope.

The US is actually falling behind in investment, production, and innovation around this incredibly sensitive industry. To none other than China. China is putting  more money into semiconductors at a faster rate than anyone else in the world right now. Graph below…

And you’d think, well, a lot of VC’s are technologists too. They must understand the importance of funding an important and SUPER SUPER PROFITABLE industry, right? (Broacom, Intel, NVIDIA, etc).

Wrong.

It’s not that simple. It also becomes about understanding the technology.  There is a lack of institutional memory in the U.S. when it comes to semiconductors. By 2025, the shortage is projected to be around 300k workers. So institutionally speaking, it becomes almost a de-incentive to invest in semiconductor startups simply because of lacking understanding, high failure rate, and a capital-intensive business model.

CHIPS and Science Act to the rescue

We’ve talked about the CHIPS act before, but basically this is the balm to the burn of funding a super expensive Semiconductor industry. We’re talking about tax incentives to produce semiconductors and help build the workforce around it…something totaling around 50 billion dollars.

But is that enough? Is that enough to ensure global dominance in this space?

Based on our half assed research, yes and no. Yes, because this is a good start. No because we’re going to continue to need the U.S. government to audit/unlock additional funding.

Because regardless of whatever bullshit VC podcast you listen to, governments have to make bets in areas that private markets aren’t willing to. Remember, some a-holes forget that the internet was a US GOVERNMENT GAMBLE.

Is there anything else? Seems like another article where you’re burying the lede.

Actually, yes.

The reason why semiconductors are going to be more important? We need to desperately fill the hardware gap to provide solutions driven by new technologies.

AI is the reason, basically.

We’ll cover that in the coming weeks.

None of this is investment advice, btw.

Have a great week!

Ahmed and Peter