To invest or not to invest in I-MOS Semiconductors, that is the question

I conducted a little survey before I started writing this blog. I took a look at the investment recommendations of fellow ETR500 bloggers who had already provided a review of I-MOS. Of the five blogs already written on the topic, four indicated they would invest or would strongly consider investing in I-MOS. One was strongly opposed to the idea (Chris Foreman, I don’t mean to single you out here). So, of course you are wondering what I would do. Well…I will not make you read my whole blog to find out where I stand on I-MOS…I would not touch I-MOS with a ten foot pole…so now that makes two of us opposed to the idea. Here is why….

For a minute, let’s forget about some of the obvious problems with the overall I-MOS business plan and start by taking a look at the company’s financial models.  First, I-MOS indicates they plan on charging their customers a one-time $1.5M license fee to use their semiconductor manufacturing technology, yet they cite no evidence that customers will be willing to pay this hefty licensing fee. However, let’s assume they will agree to pay the fee. Based on I-MOS’s customer acquisition plan (Figure A4), they will acquire their first five customers in year 3 (2006 in terms of years).  They will acquire an additional seven customers in year 4 and an additional six customers in year 5. So, if they can collect $27M if licensing fees from these customers, that still leaves them $10M of revenue to generate from their 2% royalty fees.  In theory, this should be possible since the I-MOS customers would only have to $500M of semiconductors if I-MOS collets a 2% royalty on the sales. Okay, so far so good, right? Well, not so fast…. why is I-MOS only adding six total customers in year 5 if they added five customers in year 1 and seven customers in year 2? If their technology is so great, I would expect their customer base growth rate to increase year over year, not decrease.

Next, how about their Engineering costs? They indicate they will need to spend $1.5M of development costs per fab customer per year and they will have three fabs customers by year 5. They also indicate they will need to spend $1.2M a year on leased testing equipment and software and $1M plus per year on wafer costs. So, that equates to $3.7M of expense per year (unless they can capitalize their $1.5M mask sets, however this does not appear to be the case based on the company’s pro-forma balance sheet).  Alright, so when I add up these costs it means the company will have to spend at least $23M in the first five years on these three activities. There goes their licensing fees…easy come, easy go.

Alright, how about cash flow? We all have heard the saying that cash is king, and that is especially true for start-up companies. In the case of I-MOS, they don’t reach a breakeven cash flow position until Q4 of year 4. Ouch…basically four years of burning cash before you can start saving a dollar…. This means I-MOS is dependent on all three financing offering going according to plan. Yes, they plan on investors dumping $24 million of cash into their company before they project they can swim on their own. Let me say that again…they need $24 million dollars from investors to survive…and that assumes everything works perfectly according to their business plan. We all know that reality will prove otherwise.

These only represent just a few summary thoughts on the company’s financial picture. Now, throw in the following facts in the mix:

• The company has not proven there technology works and they do not have a working prototype of the technology.
• They have not conducted a comprehensive market analysis.
• They have not clearly defined their initial target market.
• They don’t hold the license yet for their proposed product.
•  IBM and Intel have a $10B R&D budget to burn through each year to create a better technology than I-MOS has conceived.
• With the exception of the CTO, management has no experience in the high-tech industry.
• The risk mitigation strategy is all but non-existent….I mean, common, do they really think they can start making millions a year selling “simple semiconductor products” if their technology does no pan out?
• The business plan is too technical and the benefit of the product is unclear to the common reader. What does 1000x reduction in static power dissipation really mean anyway?

So, these facts boil down to one conclusion…do not invest in I-MOS.  While the paper concept sounds intriguing, the probability of success is slim at best. In my opinion, there are way too many factors that have to happen perfectly for this start-up to ever get off the ground.