Microchips, Macro Opportunities

Semiconductors have become the lifeblood of the modern digital economy, powering technologies from smartphones to cloud data centers that transform how we live and work. This silicon backbone of the technology industry has grown into a more than $500 billion global market, supporting chip behemoths like Intel and Samsung while fueling the rise of leading-edge foundries like Taiwan Semiconductor Manufacturing Company (TSMC).

The COVID pandemic put a spotlight on the outsized importance of microchips and exposed vulnerabilities in the semiconductor supply chain when faced with surging demand and unexpected shocks. At the same time, the crisis has catalyzed waves of fresh long-term investments poised to reshape the competitive landscape. Opportunities are emerging for nations targeting more domestic chip fabrication and for startups pushing innovations in semiconductors to power AI, 5G connectivity, and other cutting-edge applications. In this blog, we’ll trace some of the trends and innovations in the semiconductor sector.

Booming Demand Outpacing Supply

Behind the recent shortages and bottlenecks lies booming demand for semiconductors as the adoption of digital technologies and hyperconnectivity accelerates globally. Chips have become crucial in enabling breakthroughs like AI computing, ubiquitous sensors facilitating the Internet of Things (IoT), smarter smartphones supporting augmented reality experiences, and electric vehicles (EVs) reaching price-performance parity with combustion engines much sooner than expected.

Growth in cloud services and explosive demand for data centers has also rapidly increased chip orders from hyperscale players like Amazon Web Services fueling massive server farm expansions. Increased demand has outpaced supply – major foundries are sold out for months ahead while they work to expand capacity. Regionalization trends in global supply chains are also prompting companies and governments alike to make bets on increasing domestic chip fabrication infrastructure and expertise in this critical area as a component of national competitiveness and technological sovereignty.

In 2024, the semiconductor industry is seeing a notable resurgence, with projections from Gartner indicating a 16%+ revenue growth, reaching over $600 billion.

This optimistic forecast is buoyed by several factors: a rebound in memory chip demand, increased sales in PCs and smartphones, and notably, a surging demand for AI accelerator chips — which are expected to constitute over 8% of total semiconductor sales.

A standout segment within this growth narrative is the Generative AI (gen AI) accelerator chips, designed for data centers. These chips are at the forefront, with sales potentially exceeding $50 billion, making them the fastest-growing segment in the semiconductor sphere. This surge is attributed to robust demand from hyperscalers and enterprises integrating gen AI software capabilities, alongside fresh offerings from chipmakers.

Geopolitical Realignments Reshaping the Competitive Landscape

On the geopolitical front, East Asia has dominated semiconductor manufacturing for decades, accounting for over 70% of market revenue. However, US and European unease around relying on Taiwan and China for next-generation chips critical for national security applications is reshaping policy and investment priorities. The US passed the 2021 CHIPS Act providing $52 billion in incentives for semiconductor research and fabrication infrastructure — part of an effort to increase domestic chip production from 12% to 20% of the global supply. Similarly, the European Chips Act earmarked over €15 billion to bolster Europe’s semiconductor ecosystem and double its global market share to 20% by attracting leading companies to advance research, develop cutting-edge fabs, and cultivate talent.

Prominent chipmakers like Intel, Samsung, TSMC, and GlobalFoundries have all announced new domestic US investments and partnerships aligned to these efforts. For example, TSMC was awarded $12 billion in CHIPS Act funding for factories. Meanwhile Samsung announced it will build a $17 billion fab facility in Texas targeted to be operational in 2026. These and other initiatives promise to reshape the geography of chip fabrication over the next decade while injecting new vitality into domestic industrial bases.

Startups Driving Cutting-Edge Advances

While the multi-billion dollar “megafabs” under development grab headlines, activity further upstream from design houses, equipment makers, and materials specialists provide the critical building blocks for product breakthroughs. Equally important is the innovation coming from venture capital-backed semiconductor startups, such as the ones highlighted below that Alumni Ventures has invested in. These companies are taking on moonshot-style technical challenges and pioneering advances in specialized hardware and software capabilities.

For example, Groq is redefining semiconductor performance with its innovative Language Processing Unit (LPU), designed specifically to meet the needs of computationally intensive AI applications such as large language models (LLMs) and AI inference tasks. Groq’s LPUs provide a competitive advantage over traditional GPUs, delivering inference results four times faster at significantly lower cost and power consumption. This technology enables faster AI responses, positioning Groq as a key player in AI infrastructure.

Eeroq stands at the forefront of quantum chip technology, promising to usher in a new era of computational power. By harnessing the peculiar properties of quantum mechanics, Eeroq’s chips could one day solve complex problems that are currently intractable for classical computers. Meanwhile, EnchargeAI is leveraging AI to streamline the design and deployment of semiconductor chips. By applying AI to chip design, EnchargeAI aims to accelerate the development process and enhance the efficiency of semiconductor manufacturing.

Startups are also expanding sensor capabilities and edge computing use cases. Syntiant makes deep learning-driven vision and speech recognition chips tailored for always-on applications in endpoints like smartphones and laptops running complex neural network models while consuming a fraction of the power draw required by less advanced System-on-a-Chip alternatives. And 3D stacking techniques along with advanced interconnects enable the assembly of heterogenous chiplet architectures where CPUs, GPUs, sensors, and other discrete components can be tightly integrated into novel configurations unlocking new possibilities.

Another startup is tackling one of the semiconductor industry’s most persistent challenges: heat. FRORE Systems’ innovative air-cooling technology keeps chips at optimal temperatures, thus improving performance and longevity — a critical consideration as chips become increasingly powerful.

The Expanding Role of Policy and Regulation

Governments around the world are recognizing the importance of semiconductors for both economic and national security interests, leading to new policies and regulations that promise to further reshape the industry landscape. The US CHIPS Act provides $52 billion in incentives for domestic research, design, and manufacturing. But tax credits alone will not address structural challenges like the decline in US talent focused on semiconductor specialties. Renewed attention is being paid to boosting basic sciences and engineering programs targeting chip-related disciplines.

Trade policies also directly impact supply chains and production decisions. Export controls limiting advanced equipment sales to China led SMIC, China’s largest foundry, to warn it will lag by several generations. Such restrictions aim to curb progress in Chinese fabs but risk further bifurcating global semiconductor ecosystems between US-aligned nations and China’s orbit. Navigating and monitoring constantly evolving trade policies increases risks and uncertainty.

Environmental regulations are equally important given water usage and emissions profiles in fabrication plants. For example, TSMC invested $100M in water reclamation and recycling efforts. Sustainability commitments could advantage certain regions in attracting future investments. Successfully factoring complex regulatory compliance into long-range capital plans poses ongoing strategic challenges for all players in the space.

Speculative Future Trends and Scenarios

Many emerging technologies rely on advances in semiconductors powering embedded processing and connectivity essential for market viability and adoption. For example, drones and autonomous vehicles leveraging computer vision, 5G communications, and artificial intelligence depend on the performance per watt improvements coming from leading edge nodes. Quantum computing may fundamentally reshape semiconductor requirements where qubits operate best under cryogenic conditions without interference from ubiquitous radio waves and magnetic fields, perhaps necessitating new fabs constructed underground or on satellites in permanent darkness.

In healthcare, bioelectronics and biosensors are an area of intense research where flexible, biocompatible semiconductor materials could enable direct interfaces with the nervous system to treat disorders or enhance human cognitive and physical abilities via AI assistance. Implantable chips powered by body heat might monitor brain activity or guide muscle stimulation patterns to restore movement capabilities after injuries.

While still speculative, the long-term convergence potential for semiconductors to interact directly with biology could catalyze radical new product categories and business models while raising complex ethical issues around transhumanist augmentation. Companies and policymakers have a role to play in ensuring developments align to enduring societal values and steer this powerful technology toward equitable, accountable, and democratized applications improving quality of life.

Bright Road Ahead Not Without Challenges

While the long-term growth runway looks robust, the semiconductor landscape faces volatility in boom-and-bust cycles, which sees periods of severe oversupply and subsequent demand recovery. Market consolidation also concentrates influence in the hands of fewer large players. However, new geopolitical alignments supporting domestic and regional capacity growth coupled with waves of technology innovations promise to expand opportunities broadly over the coming decade. The melding of software and specialized hardware will also create openings for agile startups focusing on emerging workload-specific optimization while increasing capital efficiency by leveraging leading-edge foundry infrastructure.

With semiconductors enabling many transformative technologies, while economic and national security interests drive new public-private investment paradigms, the microchip domain will remain among the most vibrant, influential, and opportunity-rich sectors for giants and startups.

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