The president of Dell VC's arm explains how AI made chip startups hot, and why he bet on a new one led by 3 star engineers from Apple and Google

• Chip startups are hot, says Scott Darling, president of Dell Technologies Capital, which just invested in a new company led by 3 engineering stars from Google and Apple.
• Dell Capital is one of the investors in Nuvia, which launched late last year, and quickly raised $53 million.
• Chip startups are drawing investor attention thanks to new technologies, led by AI, that require machines with more processing power.
• Darling says AI will soon become a pervasive tool, creating new opportunities for startups. "And all of this is going to happen in a handful of years," he told Business Insider.
• Click here for more BI Prime stories.

Scott Darling, president of Dell Technologies Capital - the IT giant's venture capital arm - remembers a time when investors shied away from chip startups because they were considered too risky.

That's because investing in hardware companies, particularly chipmakers, entailed enormous costs - and risks. You need substantial amounts of money for a chip startup to gain any traction. Mistakes can lead to serious setbacks.

"The cost of doing silicon development is substantial," Darling said. "It's daunting. These companies have very substantial burns. You have manufacturing costs. The costs of a mistake are not easily remedied."

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But times have changed. Chip startups are hot in the eyes of investors thanks to new technologies that require machines with more processing power. One of the latest ones, Nuvia, came out of stealth mode late last year, quickly raising $53 million from investors, including Dell Capital.

Nuvia, which aims to build new processors for data centers, also stood out because of its founders who were engineering stars from two iconic Silicon Valley companies: CEO Gerard Williams, Apple's chief architect for nearly a decade, while Manu Gulati and John Bruno, who are both senior vice presidents for engineering, are from Google.

"It really is an incredibly experienced and capable team, and we believe the market in the data center for their technology is really substantial," Darling told Business Insider.

It was not Dell Capital's first foray into AI chips. Darling's team has also invested in Graphcore, the AI semiconductor company founded in 2016, whose chip is already being used to power Azure, Microsoft's cloud platform. Microsoft is also an investor in that startup.

Chip startups were considered risky

The change in attitude toward chip startups is refreshing, Darling, who has worked in Silicon Valley since the 1980s, said.

"There was a period like 10 years ago when the venture community considered silicon investments as kind of unworkable," he said.

But recent trends have made investing in chip startups more attractive, he added. One is the state of the venture capital market itself.

"There's a lot more money available in the venture world than there used to be," Darling said. "So the the absolute size of the dollars required for a silicon team is not as daunting on a relative basis."

How AI made chip startups attractive

There's a bigger reason for the attention chip startups are getting: the rise of AI.

AI has been a field of study in tech for decades, but it only became a vibrant and commercially viable tool in the last six years. This coincided with the emergence of more powerful computers and the dramatic increase in the amount of data to build effective AI systems.

"The amount of data being created continues to explode exponentially," Darling said. "It's exploding because people are using denser data types, not just text, but audio and video."

There are also more ways to collect data through sensors and other devices "everywhere from your cars to your homes to traditional manufacturing industries."

Collecting and harnessing vast amounts of data requires more computing power, meaning machines with more powerful processors. And that's become a major challenge. "If we continue with the current computing and power efficiency, we're going to run into roadblocks."

'The golden age for hardware'

This has triggered a race to find ways around these roadblocks.

Tech companies, led by the traditional chip giants like Intel and Nvidia, are now scrambling to come up with new, more powerful processors.

Nvidia took an early lead after it became evident that its graphics processors used for gaming and high-end graphics for blockbuster movies, could provide the processing power needed for AI systems.

But the need is so great, startups are joining the fray.

One of them, Nervana, was acquired by Intel four years ago. One of its founders Amir Khosrowshahi calls the investor interest in chip companies "the golden age for hardware" startups.

Last month, in a move that surprised some analysts, Intel bought another AI chip company, Habana, for $2 billion.

Apple recently made its own AI move by buying Xnor.ai, an edge computing AI startup, for a reported $200 million or so. The company apparently was upset by its former chief architect's decision to jump ship to launch Nuvia. Apple last month sued Williams accusing him of breaking his employment agreement. Williams accused Apple of spying on him and invading his privacy.

Darling had no comment on the dispute. He also downplayed media reports that Nuvia was taking aim at any one company.

"This is an attempt to build a much more compute and power-efficient device," he said. "I guess it's competitive in the sense that, you know, we're trying to do something better that is out there, but it's not targeted at any specific company."

If it's aimed at anything at all, he said, it is at the challenge posed by AI, which Darling predicts will usher in dramatic changes in the world of tech and beyond. And these changes will become evident in just a few years.

Five years from now

Darling said he likes to tell friends "who are not technologists" that, five years from now, "'When you touch a product that is not AI-enabled, meaning you can't talk to it, it doesn't adjust to your needs and your desires and customize itself to you, it's going to feel like what it feels like to us today to get into a car from the 1920s or something like that. It's just going to feel very primitive."

"And all of this is going to happen in a handful of years," Darling said. "So when you have that pervasive a trend, you have the opportunity for new companies that are going to develop custom technology to run those workloads. And that's what's happening with this flowering of hardware companies."

Darling has witnessed and been part of dramatic changes in technology. He worked for chip giant Intel for 17 years and for Apple for three years in from the 1980s to the early 2000s. This gave him a front row seat to the dramatic transformation of Silicon Valley.

His own attitude toward technology is informed by personal experiences. The son of a US State Department employee, Darling lived in different parts of Latin America as a child. He and his family actually were in the Dominican Republic during the civil unrest that led to a US military intervention.

The experience of living in a poor country had a profound impact on Darling, who returned to the US when he was 15.

"We lived next door to someone who lived in a cardboard and tin shack," he said. "What does that teach me? If you got enough to eat and a roof over your head, you're blessed. The plenty that most of us have in Silicon Valley is a blessing beyond measure. The privilege of working on technology that hopefully advances and helps the human condition is a blessing and a gift."

Got a tip about Nuvia or another tech company? Contact this reporter via email at bpimentel@businessinsider.com, message him on Twitter @benpimentel or send him a secure message through Signal at (510) 731-8429. You can also contact Business Insider securely via SecureDrop.