San Diego Business Journal

Qualcomm on Pace to Spend $8M on Lobbying

San Diego Business Journal, Writing

Qualcomm Inc. isn’t in the clear, yet. As it once again faces several key regulatory decisions this year, the fabless semiconductor company spent $4.29 million in lobbying in the first half of 2019, according to the Center for Responsive Politics’ lobbying database. 

That puts Qualcomm on pace with last year, when it spent a total of $8.01 million in lobbying. At the time, Qualcomm faced a hostile takeover from Broadcom Ltd., which President Donald Trump blocked over national security concerns stemming from its purported ties to China. Broadcom has since shifted its headquarters from Singapore to San Jose.

At the beginning of the year, Qualcomm spent more than electronics companies IBM Corp., and Apple Inc., according to OpenSecrets, of the Center for Responsive Politics. It was outspent by Microsoft, which spent $2.79 million in lobbying. Qualcomm spent most of its lobbying dollars between Covington and Burling, a large lobbying firm in Washington, D.C., and its in-house lobbying team.

While it’s difficult to measure lobbying outcomes, Daniel Auble, a senior researcher for the Center for Responsive Politics, said companies clearly see some value in it.

“It’s highly important to have established connections in Washington so that when an issue comes up, they’re able to react quickly and they know the landscape,” he said.

Most public disclosures refer to instances where companies will send lobbyists to meet with government officials, whether in-person or over-the-phone. The entire process is more subtle than one might expect, Auble said. Rather than pushing to introduce or kill a bill, for example, companies might look to insert or remove a sentence during committee hearings.

Generally, companies spend more on lobbying in the year after an election, and less in the year before an election, Auble said. But at the end of the day, it depends on what’s going on with their business.

“It’s typical to see a company or a trade group have a spike (in spending) in a year when something about their business becomes a public issue, or some kind of regulation or new legislation that would affect their bottom line is proposed,” he said.

Qualcomm faces two major regulatory decisions this year: whether it will be able to continue to do business with Huawei, one of its major customers in China, and whether the company will have to redraft its licensing agreements after losing an antitrust case brought by the Federal Trade Commission.

China Relations

In May, President Donald Trump blacklisted Chinese telecommunications company Huawei from doing business with U.S. firms. Chipmakers have been quietly fighting the ban, with lobbying group the Semiconductor Industry Association saying it would erode the competitiveness of the U.S. semiconductor industry.

According to SIA, the U.S. semiconductor industry had a $2.5 billion trade surplus with China last year. Huawei is a significant customer for Qualcomm, Intel and other chipmakers. Both companies reportedly have had conversations with the U.S. Department of Commerce since the ban was instated, according to Reuters, and the White House hosted a meeting on July 22 with seven tech companies to talk about potentially resuming sales to Huawei.

In the meantime, Huawei has hired two public relations firms, Racepoint Global and Burson Cohn and Wolfe, to lobby on its behalf, according to the Center for Responsive Politics. The company also slashed more than 600 jobs at its Silicon Valley research campus, Futurewei Technologies.

Trump has spoken recently about loosening the restrictions to allow companies to begin selling products to Huawei. But so far, there haven’t been any substantive changes. Huawei is still on the Bureau of Industry and Security’s “entity list,” meaning U.S. companies must apply for a license to export approved products to Huawei.

Stacy Rasgon, a managing director and senior analyst for Bernstein, said the ban is “not fun, but manageable,” for Qualcomm. The San Diego-based chipmaker sells 60 million chips per year to Huawei, he said, but they’re lower-end. Other companies may see a larger impact. Qualcomm did not respond to requests for comment on the ban’s effect on its business.

Rasgon said he’s more concerned about the potential escalation of trade conflict than the direct impact.

“My worry is, with Huawei, what’s next?” he added.

In the near-term, the Huawei ban may be a nuisance for Qualcomm, but it has more imminent concerns with appealing an antitrust case that could change its licensing business.

Legal Battles

Qualcomm’s stock soared in April, after it settled two years’ worth of legal battles with Apple Inc., bringing back one of its biggest customers. The companies also signed a six-year licensing and supply agreement. But Qualcomm’s licensing business was thrown back into question a month later, after District Judge Lucy Koh ruled the company stifled competition for baseband processors, the chips that allow phones to connect to a network.

It’s too early to predict how the appeals court will rule on the case. The panel of three judges that will hear the case won’t be selected until toward the end of the year, Rasgon said. Of the 28 active circuit judges that could be picked for the panel, 16 were appointed by Democrats and 12 were appointed by Republicans, including seven under the Trump administration.

“It’s about to be a waiting game for a while,” Rasgon said.

In the meantime, it will be important for Qualcomm to get a stay, delaying the sweeping implications of Koh’s ruling. Without one, the verdict could give its customers ammunition to renegotiate their contracts.

Some have already begun to challenge their licenses, according to statements filed in conjunction with Qualcomm’s motion for a stay. Huawei and one of Apple’s contract manufacturers have challenged their licenses, John Han, the general manager of Qualcomm’s licensing business, wrote in a July 8 court documents supporting the company’s request for a stay.

In addition, four of Qualcomm’s top 10 licensees by revenue will see their contracts expire by the end of the year, meaning Qualcomm will have to renegotiate those agreements anyway. Last year, Qualcomm’s licensing business brought in $5.16 billion, accounting for roughly 23 percent of the company’s total revenue.

Rasgon said he found the disclosures “somewhat disquieting,” adding the extent of the renegotiations would depend on Qualcomm’s customers.

Though the FTC maintains its case against Qualcomm, other regulatory agencies have gone to bat for the chipmaker. On July 17, the U.S. Department of Justice filed an amicus brief advising the appeals court to grant Qualcomm a stay, for national security reasons.

“Immediate implementation of the remedy could put our nation’s security at risk, potentially undermining U.S. leadership in 5G technology and standard-setting, which is vital to military readiness and other critical national interests,” the DOJ wrote in the filing.

Qualcomm also obtained a statement from the Committee on Foreign Investment in the United States (CFIUS), stating that a reduction in Qualcomm’s R&D spending or influence on the standards process could be detrimental to national security.

But at the end of the day, the final decision is up to the appeals court.

“It’ll be up to the judges,” Rasgon said. “They’re independent. They can do whatever they want.

Originally published in the San Diego Business Journal, July 31, 2019

An image of a cover story for the San Diego Business Journal titled "Settling for More"

Breaking coverage: Qualcomm and Apple settle

San Diego Business Journal, Writing

The announcement that shook the tech world last week immediately brightened Qualcomm Inc.’s future.

Wounded in a fight with Apple Inc. over patent licensing fees across the globe, unable to complete the deal to acquire NXP Semiconductors N.V. after China shot down its bid last year, and getting nowhere near the promised $100 stock price, the San Diego chipmaker needed the good news.

It was just two days into Apple’s multibillion-dollar antitrust trial against Qualcomm before U.S. District Judge Gonzalo Curiel. The two tech giants had been embroiled in a scorched-earth legal battle spanning more than two years and 80 cases.

The consequences of a loss for Qualcomm in the trial that began in Curiel’s San Diego courtroom April 15 could have been staggering: Apple and its contract manufacturers were expected to seek up to $27 billion in damages based on past royalties they had paid. Qualcomm would have sought at least $7 billion — the rough equivalent of unpaid royalties since Apple stopped paying for licensing in April of 2017.

Attorneys for Qualcomm, Apple, and its contract manufacturers had laid out a litany of points in opening statements before the nine-person jury. They spoke about the damage done to their companies, told sentimental stories about when Apple and Qualcomm were just startups in a garage, and compared patent licensing to Kentucky Fried Chicken.

And then, within minutes, it was all over.

Separately from the unfolding trial, Apple and Qualcomm jointly announced that they would settle all of their cases against each other. Curiel sent the jury home. Though financial details were sparse, Apple would pay Qualcomm an undisclosed amount, and the two companies signed a six-year licensing agreement, with the option for a two-year extension.

Apple will also license Qualcomm’s technology directly, rather than through contract manufacturers Foxconn, Pegatron, Wistron and Compal.

Qualcomm did share one number: It expects to see a $2 boost to its earnings-per-share as it begins ramping up shipments. This appears to indicate Qualcomm will continue charging Apple the same licensing fee as before, estimated around $7.50 per phone, said Kevin Cassidy, a semiconductors equity analyst for Stifel Financial Corp. A separate report by UBS Analyst Timothy Arcuri pegged the royalties at $8 to $9 per iPhone.

“It seems to me, they didn’t give any concessions through a lower licensing fee,” Cassidy said. “I think they held their negotiation.”

As for Apple’s payment to Qualcomm for the lost licensing fees, Cassidy estimates it will be about $5 billion. He upped his target price for Qualcomm’s stock from $57 per share to $100, indicating the company could reach the milestone it pledged shareholders last year.

Spokespeople for Apple and Qualcomm declined to comment on the settlement terms.

Why Now?

Up until the trial, a deal seemed like a distant possibility for Apple and Qualcomm. In January, Apple CEO Tim Cook said the company had not been in any settlement talks, while two months before, Qualcomm CEO Steve Mollenkopf had said the two companies were “on the doorstep” of a resolution.

Mollenkopf offered few details when he talked about the deal with CNBC’s Jim Cramer April 17.

“We talk all of the time,” he said, cracking a smile. “The companies, to get to an agreement as complex as this, you’ve got to talk.”

According to anonymous sources cited in the Wall Street Journal, serious talks began on April 15, with the final details begin hammered out the next morning.

“It seemed like the right thing to do, when you look at it from a purely business perspective,” said Robert Stoll, a partner with Drinker Biddle & Reath LLP. “Usually, when you get to that stage (a trial), there are other reasons, or personalities involved. if you take a cold, hard business look at things, you should be able to find a way out.”

Another important piece of news that surfaced hours later that might have explained the deal. Intel Corp., which was expected to supply 5G smartphone modems for Apple by 2020, announced it would no longer be making them. In fact, Intel would cut its entire 5G smartphone modem business.

It’s hard to say which came first — the settlement, or Intel’s decision.

“If Apple sensed there was little risk that they could get to 5G in the back half of 2020, I think Apple would have stayed the course,” said Patrick Moorhead, founder of Moor Insights and Strategy.

At the same time, Intel may have determined making smartphone modems was no longer the best strategy for the company, which has more leadership in PCs and IoT devices. Apple was Intel’s only customer for 5G smartphone modems.

“I think we all knew Qualcomm had the lead in 5G smartphone tech,” he said. “The question became … how much time did they have before it started to cause an issue for Apple?”

Another, less discussed possibility: Outside competitors may have played a role in bringing the quarrelling partners back together. Chinese phone-maker Huawei has its own silicon division, HiSilicon. It’s growing—even as the broader demand for new smartphones is slowing.

“The forecast is for Huawei to grow 35 percent this year in a market that will be down 5 percent,” said Cassidy of Stifel Financial Corp. “Both Qualcomm and Apple are losing market share. They’re teaming up to say, we’ve got a serious competitor here, and it’s not just Samsung.”

Qualcomm still faces one outstanding challenge to its licensing practices. U.S. District Judge Lucy Koh had yet to rule as of April 17 in the U.S. Federal Trade Commission’s antitrust lawsuit against Qualcomm, which concluded on Jan. 29.

It’s possible that the FTC and Qualcomm may settle before Koh’s ruling. The two had pursued a settlement before the trial began in January, and the FTC has faced pressure to settle based on “national security concerns.”

Koh hasn’t given an indication of when she will rule, other than to note that her decision would take longer than usual.

“It just seemed like she was highly suggesting that the two settle out of court,” Cassidy said.

Though Apple had an information sharing agreement with the FTC, with the settlement, Apple will likely not look to spend any more time on that case. The leadership at the Department of Justice has also pushed back on the FTC’s case.

“The current administration probably doesn’t want to go forward with this,” Drinker Biddle’s Stoll said. Makan Delrahim, the head antitrust official with the Department of Justice, has pulled out of agreements with the (Patent and Trademark Office) and gone more in the direction of pro-patent owner.”

The FTC declined to comment on settlement talks with Qualcomm.

Future Plans

With the extra cash in hand from the settlement, Qualcomm will be able to make some interesting moves. The company may once again be able to shift to hiring mode, and it might also become more acquisitive.

Qualcomm has said it is not interested in revisiting a deal with NXP after its failed bid to acquire the Dutch semiconductor manufacturer last year. NXP would have been an important acquisition for Qualcomm’s automotive business, but the San Diego chipmaker might be on the hunt for other options, Cassidy said.

“The goal is for Qualcomm to start selling 5G outside of just smartphones,” Cassidy said. “That’s the opportunity to acquire another company that may be selling in the automotive market.”

For Apple, it’s difficult to say if the settlement will affect plans for its new San Diego office. The Cupertino-based company announced it would hire 1,200 people for its planned tech campus, and some job postings have pointed very clearly to modem engineers.

“When they’re hiring for design engineers for a digital modem, you have to take them for their word,” said Moorhead of Moor Insights and Strategy. “At the beginning, I pretty much thought Apple was trying to poach Qualcomm engineers. … Now that there’s an armistice here, are they going to aggressively go after Qualcomm employees like they were before? I just don’t know.”

If Apple is interested in making its own modems, it also could pull talent from Intel’s and MediaTek’s offices in San Diego. And with Intel looking to offload its 5G modem business, Apple could be first in line to buy it.

In the long term, Cassidy said, Apple likely wants to build its own chips. That takes time, money and technology assets. With their six-year agreement with Qualcomm, Cassidy said, “They’ve bought themselves some time.”

Originally published in the San Diego Business Journal, April 21, 2019

Venture Capital in San Diego

San Diego Business Journal, Writing

After several back-and-forth flights to San Francisco, Seismic CEO Doug Winter finally landed his company’s first investment. The San Diego software startup raised $4.5 million from early-stage venture capital firm Jackson Square Ventures.

Since then, things have changed. Seismic’s valuation has ballooned past $1 billion, and the company has raised more than $160 million in funding to date. If Seismic’s future looks bright, expect an even sunnier outlook for San Diego, as more investors turn their eyes — and dollars — down the coast.

Peter Arrowsmith, a general partner with JMI Equity and a board member of Seismic, said he was bullish on San Diego. Though his firm primarily makes growth-stage investments in business-focused software companies, it has also made 10 investments in its backyard, including Classy and Seismic.

“In the 20 years that I’ve been here doing this, the number of good ideas and fundable companies continues to increase in the (San Diego) software market,” Arrowsmith said. “Early-stage investors outside of San Diego are active here, looking. They view San Diego as a fertile ground to make investments.”

Last year, Seismic raised its largest-ever round, $100 million from Lightspeed Venture Partners. And that wasn’t even San Diego’s largest investment of 2018. That title went to Samumed, which raised $438 million from Singapore-based Vickers Venture Partners and private investors, followed by Gossamer Bio, which raised $230 million from Beijing-based Hillhouse Capital Group, Chicago-based Arch Venture Partners, and several other life sciences firms.

A snippet of the data we compiled for the article. Notable is ARCH Venture Partners’ continued investment in San Diego startups, after serving as a founding investor for gene sequencing giant Illumina.

Outside Investors

While local VCs still play an important role in growing and nurturing San Diego startups, growing interest from outside investors has led to more eye-popping numbers.

In 2018, the total amount of venture capital investment increased to $2.51 billion — nearly double the previous year’s investment, and the highest it had been since the dot-com bubble in 2000. Favorable investing conditions coupled with a bumper crop of maturing startups are bringing money to San Diego.

Mike Krenn, president of the San Diego Venture Group, said companies here are attracting suitors of all sizes. Early-stage funds in Los Angeles have taken to looking in the San Diego area, such as Crosscut Ventures and Rincon Venture Partners, which invested $3 million in enterprise messaging company Zingle before it raised, $11 million round in January.

Larger firms, that won’t invest less than $50 million, have been snooping around, too.  

“There’s been so much interest in San Diego that I think funds that don’t have an investment here are looking aggressively,” Krenn said.

San Diego has fewer VC firms than its other California counterparts, and that isn’t likely to change soon. Former startup CEOs and finance executives have created their own funds to help fill in the early-stage gaps, but the fact remains that Silicon Valley simply has a massive concentration of venture capital.

According to PricewaterhouseCoopers, San Diego has just 46 venture capital firms, compared with 182 in the Los Angeles metro and 812 in the San Francisco Bay Area.

Those numbers might sound discouraging, but for investors who are willing to travel, it can make San Diego companies an attractive prospect.

Why? It comes down to two things: money and persistence.

Capital Efficient

Allison Long Pettine, founder of seed capital venture fund Crescent Ridge Partners, said companies that don’t have access to large amounts of cash early on tend to be more capital efficient, which is attractive to investors. And with less investment, those companies also tend to have a lower valuation, so they’re perceived as a better deal.

“The entrepreneurs also have a lot of grit and don’t give up easily. We’re seeing some wins as well; all of that combined is making people interested in what we’re doing,” she said. “You’re seeing a lot more Silicon Valley VCs, VCs from Salt Lake City, Arizona, Seattle… there is money coming in from all different places.”

One firm that appears to have taken a liking to San Diego companies is PeakSpan Capital. The software-focused firm, co-founded by Phil Dur, Brian Mulvey and Matt Melymuka, has invested in six San Diego startups to date — and it’s only started to invest out of its second fund.

“When I think back in my career 10 years ago, not very often did we think about San Diego,” said Mulvey, who is based in New York. “It’s definitely been a big increase in the volume of exciting companies that are getting to scale.”

Interestingly, few of Mulvey’s investments were made through past introductions. Rather, the company uses a software system it developed to vet thousands of companies, before reaching out to about 50 for due diligence. PeakSpan identified some of its most recent investments, including Cloudbeds, PetDesk and Zingle, in this manner.

Mulvey didn’t know of any quirk in PeakSpan’s algorithms that kept pointing the firm to San Diego companies, but noticed one commonality among startups here. Management scored big points for being transparent, collaborative and constructive, which PeakSpan considers important in its investments.

“I don’t know if it’s because of the sunshine down there or what, but almost every entrepreneur we meet is amazing in this respect — and that is a rare attribute,” Mulvey said.

Executive Talent

JMI Equity’s Arrowsmith also pointed to San Diego’s growing pool of executive talent as one of its keys for success. In addition to pitch contests and VC dinners, local groups also host events to bring startup CEOs together, to swap tips, strategies and investor contacts.

For Dawn Barry, CEO of health data startup LunaDNA, it was the company’s connections to Illumina that helped it bring in its first backers. The two-year-old company had garnered $4 million in funding, including support from Illumina’s corporate venture capital arm, Illumina Ventures; Arch Venture Partners, one of Illumina’s early investors; Illumina co-founder David Walt; and Dr. Aristides Patrinos, the scientist who helped lead the Human Genome Project.

Connections to Illumina aside, Barry said her company also caught the interest of these groups by taking their work to the next level in helping put DNA data to use.

“Now there’s so much emphasis on making an impact through the data,” Barry said. “In San Diego, we see interesting innovations at the intersections. We see collaboration between industry and academic institutions. Operating a business like this in San Diego, I think, is the perfect fit.”

Seeding an Ecosystem

When Crescent Ridge Partners’ Pettine moved back to San Diego in 2012, she said the startup community was “pretty fragmented,” and most of the companies were still in the earlier stages. Since then, startup investors and advisors have been working in tandem to push for a higher profile for San Diego companies — and the effects are beginning to show.

“If you’re going to look for a life sciences deal, you’re going to basically look in San Diego, San Francisco or Boston,” added Krenn of the San Diego Venture Group. “If you’re a tech (investment) firm, you can basically look anywhere. We help by being feet on the ground.”

For the past five years, Krenn has done just that by bringing startups to the Bay Area to introduce them to investors, and by helping outside investors navigate the network of San Diego startups.

Terry Moore, managing partner of boutique investment firm Moore Venture Partners, has also taken a similar tack with his investing strategy. He founded his firm a decade ago with hopes of rebuilding venture capital in San Diego. At the time, VC investments had slowed to a trickle, dipping below $1 billion.

Moore struck gold early with one of his firm’s first investments in EcoATM, which was acquired less than two months later by Coinstar. One of Moore’s more recent investments, Edico Genome, sold to Illumina for $100 million last year. Now, the firm is working on raising its fourth fund.

Though Moore Venture Partners isn’t a lead investor in any of its deals, the company partners with outside firms to help raise Series A, B and C rounds.

“I feel like Johnny Appleseed in a way,” Moore said. “I’ll take our top companies to Silicon Valley… sprinkle the seeds of these great opportunities and gauge the interest of a top-tier fund.”

A Lot of Momentum

In general, VC investments have been up across the U.S. for the past few years, as firms that have built up large cash reserves benefit from low interest rates.

Trevor Callan, managing partner of Callan Capital, described it as the “perfect confluence of events.”

“The financial markets in general have been recovering for 10 years,” he said. “You’ve got a lot of momentum across a lot of classes.”

San Diego is also subject to two other major national trends: fewer companies are receiving funding, but those that do are seeing much larger amounts. Those trends are expected to continue through 2019, with big rounds already raised by autonomous truck startup TuSimple, oncology biotech Erasca and DNA sequencing company Omniome.

In the long-run, Moore said he hopes to see the amount of local venture capital increase so companies can stay in America’s Finest City.

“That’s the challenge — how do we continue to grow?” Moore said. “That’s been my life’s pursuit, to increase the amount of local capital so we don’t lose our companies to Silicon Valley or San Francisco. To turn down a top VC term sheet, it’s hard to do.”

Originally published in the San Diego Business Journal, March 24, 2019

A woman crosses the border from San Diego to Tijuana.

Tech in Tijuana

San Diego Business Journal, Writing

After living in San Diego for six months, I crossed the border for the first time to attend a startup meeting in Tijuana. The process was surprisingly simple; I parked my car on one side, grabbed my papers and passport, and walked across the pedestrian bridge for the San Ysidro Port of Entry– which I later learned is one of the busiest land crossings in the world. The experience also made it easier to visualize just how many people cross the border daily for work, school, or commerce.

The focus of this article was to more closely examine some of the software firms in Tijuana, and their relationships with companies located in San Diego. Several nearshore developers are located in Tijuana, with the ability to easily cross the border and meet with clients in San Diego. But another group of startups is also working to offer developers more interesting work, and better pay, than most outsourcing firms.

Read the full story here.

Founders and tech employees meet over drinks at Republica Malta, in Tijuana’s Zona Rio district.

Sensors and Silos

San Diego Business Journal, Writing

“They were amused with the concept of a hobby drone flying around the fields. But when we showed them the data, they got interested quickly.”

When most people think about sensors, they think about self-driving cars or smart homes. But some of the most interesting use cases that I’ve encountered involve putting technology to use underground, in measuring crop yields and monitoring the health of plants.

For the San Diego Business Journal, I featured three startups putting sensor technology to use in the agricultural sector: GroGuru, a company that builds underground sensors to measure soil moisture and salinity, Slantrange, a company making drones that track chlorophyll concentration in plants from above, and Go Green Agriculture, a company building automated greenhouses for romaine lettuce.

Read the full story here.

Pictured above: A drone equipped with sensors flies over a strawberry field in California. Slantrange, a startup based in San Diego, builds drones that measure the chlorophyll concentration in plants.