Semiconductor Startup Strategy - Positioning Innovation Across the Value Chain

When we meet a semiconductor startup, one of the first questions we ask is: 
Where do you sit in the value chain? 
Are you building a component? A device? Part of a larger system? 

Because in semiconductors, your product always sits inside someone else’s stack. 
And that choice drives strategic and tactical decisions much more than most founders think. 

In our new whitepaper, imec.xpand partner and co-founder Peter Vanbekbergen explains how to think about your position in the semiconductor value chain, and why it is critical to get that choice right. 

This summary highlights the key insights, you can view the full whitepaper here.

Semiconductor companies operate in one of the most structurally complex industries on earth. Unlike software or SaaS startups, semiconductor innovation spans a multilayered value chain, from the physics of materials and wafer processing to end applications and systems integrators. So, semiconductor startups cannot define the MVP by looking only at the end application or the voice of the end customer.

They must define where the product sits in the value chain and which layers the company will own, partner for, or deliberately leave outside its scope. In semiconductors, MVP definition and value chain positioning are inseparable. For this reason, founders cannot rely on traditional entrepreneurship frameworks alone.

This whitepaper explains why classical frameworks fail when applied literally and why semiconductor startups must anchor their strategy in a rigorous value chain analysis.

The value chain structure that defines semiconductor products is multilayered:

• Materials & tools: The materials and equipment used to implement the production process.

• Process: The fundamental process in which the basic component is produced.

• Component: The component being produced by the fab, based on the engineers' design. This can be a digital chip with a particular function (e.g., processors), a specific sensor (e.g., gyroscopes, microphones, pressure sensors, or accelerometers), or an analog transducer. For a semiconductor startup, this is usually the core of the innovation.

• Package: Packaging is needed to protect the sensitive component and enable it to interface and connect with other components and the external environment.

• Devices: A combination of packaged components.

• Embedded software: No hardware solution is complete without software. Embedded software is low-level software that communicates directly with the device(s) and provides functionalities such as initialization, calibration, and artifact reduction.

• Application software: The higher-level software that implements the application that will be visible to the end user. It encompasses a wide range of applications, such as AI models, displays, object detection, and data storage.

• Full solution: The product in which the application fits. Examples include servers, smartphones, laptops, cameras, and drones.

Each layer has different actors, economics, qualification requirements, failure modes, and customer expectations. Determining which layers are covered in the MVP is an essential decision for startups. It determines their target customers, pricing, gross margins, strategic partnerships for the remaining layers, and the resulting integration and support burden.

Most entrepreneurial frameworks look (only) at the application level and ask highly relevant end-user questions at the application level. Based on the “voice of the customer,” they then select one specific application as the beachhead. This ignores the fact that semicon products are, in most cases, not at the top of the application stack. This approach creates MVPs that exist only as demos or reference designs - appealing in presentations, but disconnected from the realities of process transfer, packaging tolerances, device integration, embedded firmware requirements, and application software.

In semiconductor deeptech, you cannot define an MVP without defining where it sits in the value chain, as this has a huge impact on many critical factors that can make or break a startup. These are the items to consider when analyzing the value chain and defining the MVP’s place within it:

• Full solution

• Customers for the MVP

• Partnering to build the full solution

• Partnering to build credibility

• Win-win

• Time-to-market

• Expertise

• Moat

Insufficient focus on the MVP’s position in the value chain is one of the primary reasons semiconductor startups mess up the go-to-market, have unfinished and low-quality products or, even worse, never reach a working product.

Products lower in the value chain tend to be more generic, while the higher you go, the more application-driven the technology becomes. This reflects fundamentally different strategies for the company.

We assume that when the company launches a product, part, or all of the production will be outsourced. Generic technologies lower in the value chain usually enable higher volumes. That enables easier win-wins within the supply chain and allows lower-cost production. Products on the application layer usually (though not always) enable higher margins at lower volumes, making it harder to reach a win-win with suppliers.

The business plan, MVP definition, and place in the value chain need to create a win-win situation with supply partners. A fantastic product definition that can make the company rich, but that no supply partner is willing to produce, is a no-go!

It is also essential to consider margins at each level. Do not automatically assume that margins higher in the value chain are better. There are many industries (e.g., health system solutions) where this is true, but several others where it is not. It is essential to include realistic margin estimates in your value chain analysis.

A semiconductor company should be built around the layer with the strongest unique differentiator. Outsource everything else as much as possible.

Startups that try to cover too many layers dilute scarce engineering resources, extend timelines, and create failure points. Semiconductor startups often end up simultaneously managing process development, chip design, packaging, device integration, firmware, application software, and end solution - far exceeding the capabilities of an early-stage company. This often leads to missed milestones, poor product quality, and delayed customer traction.

There are cases where the initial differentiation is in a layer that the startup cannot (fully) own. A typical example is a company with a differentiated technology process that must run in an external fab to produce the differentiating component. In that case, the company must build an additional moat (e.g., patents, software, or design) on top of the outsourced layer. If that is not possible, you should fundamentally question the company’s capacity to become a product scale-up company.

The company must determine which layers:

• anchor the USP (e.g., novel transducer physics or proprietary signal processing tightly coupled to hardware);

• can be supported by partners without losing defensibility;

• can be added later once the company has capital and maturity.

This requires realistic leadership and discipline, combined with excellent partnership building.

Analyzing the commercial effort to generate product revenue is another important element of value chain analysis and positioning. Lower layers in the value chain usually have fewer customers with higher volumes. Each of these customers is technically extremely demanding. Higher layers dramatically increase the number of customers, and the markets there are usually more fragmented.

This analysis can be formalized by applying COCA (cost of customer acquisition) and COCS (cost of customer support). The results of this analysis can quickly indicate the type of market access a startup with scarce resources can realistically support. The choice will also heavily impact the size and cost of the commercial aspect of the organization.

Selling chips, sensors, or transducers entails navigating long, technical design-in and design-win cycles with a relatively small set of highly specialized customers. The commercial effort is centered on influencing engineering teams and system architects; meeting strict performance, cost, power, and reliability specifications; and aligning with the customer’s product road map. Success depends on deep technical credibility, application support, and the ability to reduce integration risk. Once designed in, the revenue stream can be relatively stable and long-lasting, but the sales process is front-loaded, resource-intensive, and heavily dependent on technical differentiation.

Selling systems to end users means driving market adoption by clearly articulating and delivering a compelling value proposition to a broader and more diverse customer base. The commercial effort extends beyond technical fit to include ROI justification, budget approval, competitive positioning, distribution, branding, pricing, and aftersales support. Decision-making involves multiple stakeholders - technical, operational, and financial - and revenue must be continuously generated through customer acquisition, service quality, and lifecycle management. Success depends not only on product performance but also on market access, commercial execution, and the ability to scale demand.

Value chain positioning is a company-defining strategic choice. It determines what the MVP actually is, who the first customer is, which partners are critical, which economics must align, and which layer the company can defensibly own.

The practical implications are clear:

• Define the product from application analysis, not from technology pushes, and translate that application analysis back into a precise value chain position.

• Understand customers, volumes, margins, qualification requirements, and partner economics at each layer before committing to the MVP boundary.

• Keep internal scope narrow and partner aggressively on non-core elements that others can execute faster or better.

• Include the complexity and cost of selling the product in the analysis, because the direct customer changes with the position in the value chain.

• Build customer credibility through partnerships with established companies.

• Extend the value chain only once the company has commercial traction, because the direct customer changes with the position in the value chain.

Early-stage teams must resist the temptation to build everything themselves, even if they believe they “could” do so. Overextension is a silent killer. The best semiconductor startups are the ones that know exactly which layer to own first, create win-wins around that position, and earn the right to expand only after the first product has proven its value in the market.

This summary highlights the key insights of the whitepaper 'Semiconductor Startup Strategy - Positioning Innovation Across the Value Chain'.

You can view the full whitepaper here, including two case studies.