John Hodgson, former CEO of CSR Smart venturing CSR’s journey from Bluetooth to blue-chip

John Hodgson is the former CEO of CSR, one of the greatest technology success stories in recent years and a role model for aspiring technology businesses around the world. John joined the company 18 months after it was founded, building the business into the market-leading position in the Bluetooth market and leading it through a successful IPO in 2004. SEP led a pre-IPO funding round for CSR of $20 million.

As John describes it, the team got things ‘mostly right, most of the time’. Here he reflects on what he learned from his time at CSR and what young companies can do to follow in its footsteps.

Some emerging companies, I’m told, are claiming they’ll be “the next CSR”. Sounds encouraging, but it raises the question, “what does it actually take to produce similar results other than good luck?” When people look at CSR, all they see is the success, but it was a continuous uphill battle to achieve that result that was won by some brilliant minds with a great deal of hard work and the absolute conviction that we would emerge as one of the market leaders.

I can comment only on the semiconductor business, but it seems to me the first requirement is to identify a market you passionately believe in. A market that’s early in its development - so early in fact, that if its size can be defined with any confidence and accuracy, it’s probably too late to enter it.

That of course goes against the grain of what potential investors would like, but the reality is that at the beginning of a market no one knows how big it will become or when. You can’t find a nice handy report with all the numbers you need, but if you do, you should not give it too much weight. It can only be a belief at that stage, and that is always going to be a gamble, which is why you have to be passionate about what you are doing and have the courage of your convictions.

Those convictions must be based on solid ground, however, and that comes from the strength of the team and the technology. You need a technology that you believe will provide a clearly defined advantage to your targeted customers while, at the same time, one that is clearly differentiated from potential competitors.

In CSR’s case, Bluetooth technology offered great promise with convincing support from industry giants - Ericsson, who established the standard along with Intel. Nokia, Microsoft and Motorola joined them and formed the original Bluetooth SIG or Special Interest Group. This provided truly unique support for a new industry standard.

Few others however really believed in it. An ill-informed article appeared in Silicon Valley in the early days entitled ‘Bye Bye Bluetooth’. Naturally it irritated us at the time but I now have it framed, it having been given to me by an investor the Christmas after our IPO. If it encouraged apathy amongst our American competitors it actually served us well. Even some of the initial Bluetooth founders waivered in their commitment over time. Keeping faith through times like this can be hard, but you have to remember that more often than not, the people who knock you have a vested interest. Maybe they have a rival technology they want to promote. Or a headline they need to write that sounds controversial and punchy to grab some attention. Or they may simply want to delay the market to give themselves the time to catch up. Whatever, you can’t let it make you doubt yourselves.

At CSR we believed we had a world-class technology team with the capability to deliver what the industry said couldn’t be done - the holy grail was a system on a single silicon chip that was smaller, used less power, and cost less than competitors, but met the specifications that customers needed and the standard required. We never doubted we could do it, and we also knew that when we did, that we would be one of the leaders in this market. You cannot over estimate the importance of the first mover advantage and especially so if you are a start up enterprise.

Which leads to the next requirement - funding. The investment community is necessarily cynical by nature and must be persuaded that the opportunity is real and that you have what it takes to be the market winner. The business plan produced by CSR’s founders convinced the first-round investors that they could make the breakthrough, while the rest of the industry simply rejected the idea that a high-frequency radio could be built in bulk CMOS, let alone integrated with the baseband and memory and turned into a system with endless software requirements. Those first VCs placed their faith in us as a team more than anything. They maintained confidence in us throughout the subsequent rounds and were well rewarded for their trust. Intel Capital provided the second round of financing and participated in each subsequent round despite their corporate focus on WiFi.

For those companies aiming to follow in CSR’s footsteps, from my experience some of the rules of funding are, first, raise far more money than you think you’ll need to avoid expensive and time-consuming additional rounds. The well-known cliché that “cash is king” is absolutely true, and the CFO needs to be a Scrooge at heart who can ensure that all levels of the organisation understand that each dollar raised can only be spent once. Many of us at CSR had to constantly travel around the world and we went everywhere in economy class. It meant miserable 10 hour trips squashed into a seat too small to even open your laptop but that was just the way it had to be. At the peak we were burning $5 million each quarter. There was no way we could justify extra expense where it wasn’t absolutely necessary. When we finally broke even and began generating a profit we agreed that for long haul flights we would stretch to premium economy seats. Frequent travellers of course tried to leverage their miles for privileges and ease the pain of modern day travel!

And second, raise money before you need it, and always set up a competitive process to ensure the valuation of a round is set by the market. Securing funding is more important than the source, although VCs and strategic investors with respected names do usefully lend their stature to an enterprise. The price of the money and consequent dilution is less important than getting enough resources to do the job, and it helps to remember that it always takes longer than you expect to deliver on the commitments made.

Market, technology, and funding are only as useful as the practical execution. And here, timing is critical. The company must strive to hit its plans on schedule, and the solution that best meets the requirements as the market takes off is the one that will win. Being too early can be as disastrous as being too late. CSR was not the first to market. Pioneers Ericsson and Digianswer (acquired early on by Motorola) were first, but in the end failed to deliver competitive product when the market opened up.

Technology and product development are relatively cheap compared to ramp-up costs for marketing and manufacturing where timing is essential and spending must be in phase with market developments. Setting up sales, marketing, and field applications organisations at the necessary locations around the world requires significant energy and money.

Persuading customers, especially the high-volume, major corporations that you must win, is orders of magnitude harder than you can imagine. A new vendor is a major risk for a customer, and your products will be used only if you can deliver, and be seen to deliver, a significantly better solution than their traditional and trusted suppliers. Even that is not always sufficient to secure business.

Gaining design wins is the goal, and winning requires a determined, coordinated team of applications engineers and sales and marketing personnel, supported by development, manufacturing, and management. Your company must refuse to accept repeated rejection and must have the grit to battle until successful. In CSR’s case, through fortitude and persistence we eventually acquired a customer base that’s literally a “who’s who” of the industry.

Another significant challenge is the ability to ramp up manufacturing. CSR, as a fabless semiconductor vendor, planned to subcontract production, and we found that getting the attention and support of major vendors who can deliver technology, volume, costs, and quality is as difficult as getting critical customers. We worked closely on a sole-source basis with TSMC and ASE, the industry-leading wafer fab, and, assembly and test suppliers, to become significant customers of both. A start up must establish an early reputation of being able to deliver to customer demand. In addition, strong technical programs were instituted, including process and product enhancements tailored to the specific requirements of high-frequency technology.

Cost reduction was always a high priority, delivering the relentless year-on-year price reductions demanded by customers while maintaining gross margins essential to financial performance.

Developing and maintaining excellent relationships with key people at customers and suppliers is absolutely essential and much harder than you would think. It takes the involvement of the entire company and success builds on success, one relationship at a time, over the years.

Competitors too can make or break an opportunity. The better you are, the more they engage in negative selling, which can be a very frustrating and effective tactic. In our case, we were lucky - CSR was blessed with great competitors. The American community were focused on WiFi and showed little interest in Bluetooth, but nevertheless insisted they were going to engage. This gave the customers the necessary confidence to develop products to the new standard with our technology. The Europeans simply didn’t execute, and a host of start-ups failed for one reason or another.

With CSR, there was a great deal of interest in the IPO, but that was just a milestone along the way for us, not our end goal. Investors always have an exit plan in mind to secure the return they need, but the company cannot simply plan for that, whether it be a trade sale or a flotation. To create a sustainable business, management must run the enterprise to build value for the long term. It must be said though that the IPO was regarded as a sign of success and did noticeably raise our stature in the eyes of customers, suppliers, new employees, as well as the investment community.

CSR has progressed through start up to establish itself as a successful public company. Maybe that was the easy part, and the task that lies ahead is to secure a permanent position as a major semiconductor vendor on the global stage - one desired by its customers and suppliers, providing valued returns to its investors, respected by its competitors and, most importantly a place where its employees find satisfaction and reward. I have every confidence they will. CSR is a valuable asset to the nation and arguably the most successful UK semiconductor company ever.

In the final analysis, execution is everything and CSR got most of the factors right... most of the time! But knowing when you’re getting it right can be difficult. The genius of a founding team needs balancing with the seasoned experience of people who’ve already made their mistakes on someone else’s money. The most important element is the people in the company working exceptionally hard as a team and supporting each other through the inevitable ups and downs. Each part of the organisation must trust the others to perform, and must strenuously avoid the turf wars so destructive in mature organisations. No matter how bad it gets - and it will - never ever blink!