T.J. Rodgers' Startup Strategy

The Cypress Semiconductor CEO's approach to new marketsfunding outside companies, not internal groupshas made it No. 4 on our Tech Hot Growth list

T.J. Rodgers knows people often don't like what he has to say. The outspoken chief executive of Cypress Semiconductor (CY) has made enemies calling Social Security "a terrible scam" and describing government business subsidies as "corporate welfare." And he didn't win many friends by publicly arguing with a Catholic nun against diversifying Cypress' board with female and minority directors.

When he wants something, Rodgers doesn't stop talking until he gets it. In 2001 he wanted Cypress to invest in solar energy, though few people, least of all his board of directors, understood why.

At the time, the semiconductor industry was reeling from the collapse of the dot-com bubble. Rodgers, the man dubbed "The Bad Boy of Silicon Valley" in a 1991 BusinessWeek cover story, was presiding over red ink and layoffs. Yet he was demanding the board spend cash to buy a grad-school buddy's struggling solar energy company. "We were getting our ass kicked," recalls Rodgers. "And, oh, by the way, I want to invest in solar energy."

Fighting for Solar Power

Even if Cypress hadn't been losing money, the board's reticence would have been understandable. After all, Cypress was a semiconductor company. What did its employees know about alternative energy? More important, what did Rodgers know about it? In some respects, the solar energy business is exactly the sort he loathes: It is heavily subsidized by government funds, both in the U.S. and abroad, and it is a darling of the Green Party.

As a libertarian from Wisconsin, Rodgers' green leanings were in a very different direction: the Green Bay Packers and alma mater Dartmouth, "The Big Green." And he felt certain that solar technology developed by friend Richard Swanson's SunPower could make Cypress more green. But when Rodgers says "green," he's not referring to the environment; he's thinking of the currency.

"If somebody says, 'I'll give you $100 dollars for the change in your left pocket,' you don't need to do a calculation," says Rodgers, who gave $750,000 of his own money to keep SunPower afloat while he was trying to convince the Cypress board to buy it. After 15 months of arguing, Rodgers had convinced the board of directors to invest $9 million in the struggling company, which makes solar panels that produce more power than rival products.

A few months later, Cypress bought majority control of SunPower and invested in additional plants and equipment for the business, bringing its total investment to $168 million. In November, 2005, SunPower (SPWR) held an initial public offering of stock at $18 per share. These days it trades at nearly $125, for a market value of $10.4 billion. Cypress owns more than 53% of the shares, a stake worth $5.54 billion—more than Cypress' own market capitalization of $5.3 billion, suggesting some investors consider SunPower's shares overvalued.

Demand for Alternative Energy Is on the Rise

SunPower is a major reason Rodgers' 25-year-old company, largely a niche player in the mature semiconductor industry, ranks fourth in BusinessWeek.com's ranking of the top 75 high-growth tech companies (BusinessWeek.com, 12/3/07). SunPower accounted for about half of the $450 million in total revenue Cypress pulled in during the third quarter of 2007.

SunPower's success is driven by soaring demand for alternative energy, with tensions in the Middle East boosting oil prices and raising doubts about reliable crude supplies. The U.S. market for solar power, which totaled about $500 million in 2005, is expected to reach $1.3 billion by 2010, according to Jennifer Mapes, an industry analyst at Freedonia, an Ohio-based research firm. The solar energy market is so hot even Google (GOOG) may want in. On Nov. 28 the king of Web search and advertising announced the creation of a research group dedicated to developing cheaper alternative energy sources such as solar and wind power. Google says it may spend hundreds of millions of dollars on the project.

Also on Nov. 28, SunPower announced a deal that may help the U.S. market expand even faster: SunPower secured $190 million in financing from Morgan Stanley (MS) to install solar panels on corporate and public buildings and then sell the resulting electricity to the building owners. The initiative's aim is to accelerate adoption of solar power by enabling building owners to purchase solar energy without an up-front investment in equipment.

Subsidies' Benefits Disputed

Such investments are a far cry from the forces that have driven the solar industry since its inception. The main source of funding has been government subsidies to partially or entirely offset the cost of solar panels in hopes of reducing pollution and easing the strain on local power grids. "The availability of [private] funds makes a big difference," says Mapes. But, she adds, "a lot of it [still] comes from government incentives."

How does that funding model square with Rodgers' vehement dislike of government subsidies? Although subsidies would appear to benefit Cypress, he argues they've hurt the solar industry. Without subsidies, he says, solar companies would have been forced to develop cheaper equipment sooner. But so long as the government is doling out subsidies, Rodgers won't hurt his company or shareholders by refusing them. "Certainly the subsidies have made it viable earlier," says Rodgers. "At the same time, I wish neither my company nor any other had them."

His determination to reduce expenses for the design, production, and installation of solar panels is evident on SunPower's Web site, where the company confidently promises to compete with retail electric rates by 2012, a move that would require it to reduce equipment costs by 50%.

New Markets Get the VC Treatment

But Cypress' successes include more than a winning solar bet. Rodgers' risk-taking spirit has produced other lucrative opportunities. "Love him or hate him, he is a very dynamic individual," says Chris Crotty, a former Cypress employee who is now a market analyst at research firm iSuppli.

Rodgers lauds Silicon Valley's venture capital model as the best entrepreneurial system in the world, and Cypress' approach to new markets is based on that model: Rather than create a new internal division, Cypress funds an existing startup or a brand-new company with outside staff. Each such venture has its own board of directors, which always includes Rodgers. Once a company is generating $10 million in quarterly sales, with profit margins of 25%, Cypress decides whether to keep it as a subsidiary or "turn it loose" by selling it or taking it public, says Rodgers.

Since founding Cypress, Rodgers has funded SunPower and six other startups with varying success. He prefers to run just one at a time. "They are crying babies," explains Rodgers, adding that startups often don't have the organizational systems in place to manage seemingly simple matters such as hiring and compensation changes. "You've got to get up every night at 3 in the morning." Of its six other startups, Cypress has sold one, microprocessor maker Ross Technology, to Fujitsu for $23 million in 1993.

Reliable Chips and Ventures

The startup strategy has yielded another big win: Cypress' PSoC (for Programmable System-on-Chip), which Apple (AAPL) used in designing the iPod click wheel. The PSoC translates analog data, such as finger touches on the wheel, into commands a device can respond to, as in "turn up the volume."

Cypress recently shipped its 250 millionth PSoC. The PSoC unit has grown from a $16 million business in 2003 to $96 million in 2006. New PSoC designs have started to win Cypress contracts with other devicemakers, including Hewlett-Packard (HP), Lenovo, Nintendo (NTDOY), and Pentax.

Rodgers' latest venture is Cypress Systems, which he recruited Honeywell International (HON) executive Harry Sim to head in 2006. The company, which builds custom computer systems that rely on Cypress chips, is generating sales already. Without Cypress' infrastructure, Sim estimates it would have taken twice as long to bring in revenue. "It's the best of many, if not all, worlds," says Sim. "When you are a little startup, you struggle just to get your payroll and office set up. You have no brand. When you try to get loans, creditors won't sell to you. Now that we are part of Cypress, we are up and running right away."

With the PSoC and SunPower successes under his belt, Rodgers finds himself facing a different problem than he had in 2001, when he was trying to persuade the Cypress board to invest in SunPower. Today, Cypress' board of directors wants Rodgers to find, and fund, more startups. "I get the question, 'What's next?'" says Rodgers. The board wants to know "what the next miracle is."

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