Russia-Ukraine Conflict Could Further Rankle Supply of Semiconductors And VC Funding

While 2021 was a record year for VC-backed semiconductor startups raising money, this year has started off much slower—a trend that may continue due to the Russian invasion of Ukraine.

Last year saw VC-backed semiconductor startups—which includes everything from chipmakers to design firms to hardware developers—raise more than $6.4 billion in funding, according to Crunchbase data. That number dwarfed the $3 billion seen in 2020.

However, thus far this year, such startups have only raised about $237 million, according to Crunchbase.

Although that is not alarming—it is only February, after all— it does put funding in the sector on pace for its lowest mark in three years.

What may be of more concern is where the sector could be heading.

Both Ukraine and Russia are key sources for ​​neon gas and palladium, both of which are needed in the manufacturing of semiconductors.

According to research firm Techcet, the U.S. neon supply “is almost entirely from Ukraine/Russia,” while Russia also is a “key supplier” of palladium, providing about 33 percent of the worldwide supply.

Without such resources, the manufacture of chips could slow and those companies that design new and improved semis, which many startups do, could be less attractive to investors since those designs may not have an opportunity to be produced in the near term.

Regardless of even that, the tensions in Eastern Europe are unlikely to help the semiconductor supply shortage. Traditionally, the supply chain was balanced on a razor’s edge. That balance was disrupted thanks to a pandemic and the ever expanding demand for more chips as industries like autonomous vehicles and robotics grow, and connected devices continue to proliferate.

More risk and the great unknown is likely only to exacerbate those disruptions.

On Thursday, the White House announced it is issuing new sanctions against Russia that  include new export controls on technology including semiconductors.

What remains to be seen is whether those new sanctions will have any effect on Russia— especially as the pipeline of some of the crucial building blocks of those chips now seems closed.

Illustration: Dom Guzman