The No-VC Semiconductor Company

An adapted excerpt from Tough Things First by Guest Author Ray Zinn

Micrel was launched on my personal credit.

I wanted to avoid venture capital and family loans when starting my semiconductor company, so I approached three different banks. I knew that banks didn’t lend to start-ups with unproven management teams and no products. But given that the alternatives – VCs and family – were unacceptable, I decided to make it work, to make the banks lend me kick-start capital.

Two banks flatly refused, and in such a way I assumed I might be escorted out of the building. But I learned enough from those encounters to plan the third attempt. That was the First National Bank of San Jose which later became Bank of the West, and we are still their customer today.

I sat down with two gentlemen from their loan department. Their initial response echoed that of the previous two banks. “Okay,” I replied. “Let’s just pretend. What would it take for this bank to loan to a start-up?” I wanted to understand why banks feared lending to new tech companies and thus how I could resolve those issues.

“Well, it’s not worth our time because we’re not going to do it,” they said. “So what’s the use in pretending?”

“Because it will help me. I want to understand why banks won’t consider loaning to a start-up.”

After a bit of round-robin chatting, I sensed they wanted to appease me or get me out of the building. But they agreed to create a term sheet, a list of what a bank would require of a start-up like mine as a way of showing me the barriers and then showing me the door. “Remember, we have no intention of loaning any money to you.”

They kept their word and they presented their perfectly ridiculous terms for loaning an unknown start-up their depositors’ money. The terms were onerous. Their utterly unreal covenants included a debt-to-equity ratio of .5 to 1, meaning I would have to put in twice as much money as I got in the loan. They also insisted that I could never lose any money at any time, even on a quarterly basis. They wanted me to be profitable from the get-go.

“Do you have a pen?” I asked. They looked a bit puzzled and inquired why I needed a pen while reaching for one. “Well, I just want to borrow a pen.” They handed one to me and I said, “Okay. I signed the document. I’ll agree to this.” This group of otherwise stoic bankers were visibly flummoxed. I kept the pressure on them, holding up their unacceptable term sheet. “Here’s your offer and I’m accepting it.”

“Why would you agree to this? You won’t succeed. You’ll fail!”

“Why would you want me to fail?”

“Well, Mister Zinn, we don’t want you to fail.”

“Then let’s make some of these terms more reasonable.”

I managed to get them to relinquish some of their more ridiculous ones. The required debt-to-equity ratio became 1 to 1 instead of a .5 to 1. We found common ground regarding cash retention at the bank and corporate profitability.

A bemused banker leaned in and said, “This is the first time in the history of this bank that we’ve ever loaned to a company that really has never been in business. has never been an ongoing success.”

“Good. I like to be the first. And I want you not only to loan me the money, I also want you to finance this piece of equipment, and I want to be 100-percent financed including the taxes.”

They looked at me as if I had something growing out of my head. “You got to put something down on it,” the formerly genial banker replied.

“I’m already putting up half of the cash. I need something for working capital because of your strict covenants.” They finally agreed to finance 100 percent on the equipment that I was buying, if for no other reason than it was usable collateral. But it was an important term because this piece of equipment was basically the guts of my new company. I had to modify my business plan and the business I was going to go into in order to support a monthly loan payment. But I made it work. I was able to secure some testing services work from other companies and the company was profitable from day one. It would have been impossible to start out as a full-blown semiconductor company making deliverable products. I had to begin operations doing services for other companies.

About six years later, after Micrel was doing quite well, the bank came to me and asked if I’d like to get off the guarantee, to no longer be personally responsible for the debts of the company. I knew why they offered me the chance to escape – because it is expensive for a bank to keep renewing the paperwork every year when it was obvious that Micrel would pay off the loans.

I told them that I wanted to think about it.

That stunned them. “Why? You should want to get off the guarantee.”

“Well, that depends. The culture of the company is to be profitable and to do whatever it takes. I like the feel … that edge, that keeping my nose to the grindstone. I get that when I know my home is on the line. Not only that, but I can tell my people, my employees, that I’m on the hook for the entire debt. It keeps them loyal to me.”

A week later I let them know I was staying on as a guarantor. “That’s a first,” said my contact at the bank. “We never, ever heard of anybody wanting to stay on a personal guarantee when they easily could’ve gotten off of it.”

Debt financing has motivational as well as enduring benefits. First is that you can only lose your business if you fail at being profitable. Financing with banks is like floating a mortgage on a home, whereas taking VC money is like a reverse mortgage where somebody else owns your house. Having your assets on the line with bank financing drives you to find ways of being immediately profitable, which Micrel was in the first year.

Though nobody likes paying interest on bank loans, the interest I paid to launch Micrel was far less than the value of the stock I would have surrendered to VCs. It also gave me the control I needed to create a profitable company (as opposed to one that unprofitably grows market share rapidly) – a company that remained consistently profitable for over three decades in an industry where competitors routinely lose large sums of money.

Raymond D. “Ray” Zinn is an inventor, entrepreneur, and the longest serving CEO of a publicly traded company in Silicon Valley. He is best known for creating and selling the first Wafer Stepper (an industry standard piece of semiconductor manufacturing equipment), and for co-founding semiconductor company, Micrel (acquired by Microchip in 2015), which provides essential components for smartphones, consumer electronics and enterprise networks. He served as Chief Executive Officer, Chairman of its Board of Directors, and President since Micrel’s inception in 1978 until his retirement in August 2015. Zinn’s philosophy on people, servant leadership, humanistic management and the ethics of corporate culture are credited with Micrel’s nearly unbroken profitability.

Zinn also holds over 20 patents for semiconductor design. A proud great-grandfather, he is actively-retired and mentoring entrepreneurs. More info can be found on Zinn’s social media pages: Linked In (https://www.linkedin.com/in/rayzinn) and Twitter (https://twitter.com/Ray_Zinn_) and at ToughThingsFirst.com.

His new book, Tough Things First (McGraw Hill), is now available for pre-order at ToughThingsFirst.com, Amazon and other fine booksellers until its release.