Ahh Silicon Valley – a beautiful 50-mile strip located right on San Francisco Bay between San Francisco and San Jose. It's home to innumerous technology companies including global chip heavyweights Intel and AMD. Silicon Valley used to be the go to place to start a new chip company however startups are starting to attract less funding and much of the development can now be done in China.

The current hot investment is social networking, e-commerce and online-gaming companies. Manuel Hernandez, CEO of Hercules Technology Growth Capital sums it up, “Semiconductors aren’t as sexy, you don’t get the valuations and you don’t get the multiples.

Venture financing for U.S. Semiconductor companies dropped 36% to $894.9 million in the first 3 quarters of this year compared to $1.39 billion in 2008. Last year, venture capital funds invested a total of $863.6 million in chip companies, the lowest since 1998. First time investing in chip companies accounted for just 1.1% of total initial funding this year (compared to 17% for software companies).

One company that has been able to receive funding despite the tough environment is MaxLinear. MaxLinear creates chips for set-top boxes, digital television, computers and mobile phones. CEO Kishore Seendripu, used his own money to start the firm and paid for initial production runs by handing their data to a Taiwanese manufacturing company.

The exporting of chip manufacturing is a strong trend in Silicon Valley and is being pushed by the likes of Dada Banatao, managing partner at Tallwood Venture Capital. Banatao is encouraging his portfolio companies to expand abroad in China to take advantage of government support and lower production costs.

China is starting to receive a tangible benefit of this increased manufacturing by playing a greater role in designing and innovation. PricewaterhouseCoopers predicts that China’s worldwide share of chip-related patents will be 33% this year compared to 22% last year.

So for those of you who thought China would only stay as a manufacturer, take another look because the next big design patent has a high probability of coming from China.

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