Producing a cutting-edge chip today is more difficult and more expensive than it's ever been. With a foundation in Moore's Law, which dictates that the number of transistors on a chip doubles every two years, the rules of economics and physics are stretched. Semiconductor makers are spending billions, to either build joint manufacturing facilities (called fabs) or to create research agreements that help offset the basic costs and challenges involved in trying to push a technology forward.

With costs for the latest technology rising, smaller startups and their venture backers have taken a look at the benefits of keeping up with the Intels, and decided that in some cases, old-school technology may be the best way to make a product — and a buck.

Even as costs have risen on the manufacturing side, the exit opportunities have shrunk. In 2007, which was a banner year for IPOs, nine chip companies made it to the public markets — and all but two of them are currently trading at below their offering-price levels. Also last year, 12 chips companies were purchased, according to data from the National Venture Capital Association, while back in 2006, just two chip companies went public, while 17 were acquired. Given the state of the exit markets, it's no wonder that venture investors are scrutinizing the returns on the $9.91 billion they've invested in the space since 2003.

But those that are sticking with chips are searching high and low for capital-efficient chip startups. Jim Jones, a general partner at Scale Venture Partners, says he doesn't want to put more than $50 million into a chip startup to get it to profitability, because beyond that point it just doesn't generate the returns needed to justify the investment.

So in an effort to save money and preserve their returns, Jones and other VCs are investing in the next new thing — built using technology from the previous decade. Instead of following in the footsteps of the top chipmakers such as Intel, AMD and Samsung, which are packing more onto smaller chips, startups are turning to process technology from up to 10 years ago.

Jones points to Auvitek International, a startup designing chips at the 130 nanometer node — the node at which Intel was designing products back in 2001. The company, which makes a modulator that receives over-the-air-broadcasts on TVs or PCs, has managed to get its products to general availability with $13 million in funding. Another Scale portfolio company, Xceive, is making an analog tuner at 180 nanometers; it's been selling chips for two years on $25 million in capital.

Many consumer chips targeted at consumer applications, like those above, don't have to be that fast. Other types of chips that don't require speed as a differentiator, such as power management chips or RF chips that have antenna modifications, are also viable targets for older manufacturing processes.

Drew Lanza, a general partner at Morgenthaler Ventures, says the firm realized about two years ago that the current race to the leading edge wasn't going to mean viable exits, so he started to look at investments beyond those in processors and graphics-oriented chips. So far Morgenthaler has invested in SiPort, a high-definition radio chip maker manufacturing at the 130 nanometer node, and ZeroG, a low-power 802.11n chip.

"I think we're seeing a fundamental shift here," Lanza told me. "For a long time, startup companies helped drive the leading edge of Moore's Law, and I don't think we're going to be doing that anymore. We may have EDA startups and we may back manufacturing equipment, but I think we're off Moore's Law, probably forever. We used to be maybe one generation behind the leaders, but we're three to four generations behind Intel now."

This trend may make sense for startups in certain sectors, but when it comes to industries such as communications or processors, the need for speed at lower power means that startups must raise enough money to build at 65 nanometers. That can be pricey; it costs about $30 million to design a chip at 90 nanometers, but those costs can reach $100 million for a startup seeking to design at 65 nanometers.

In other cases, it makes sense to start out on a larger node, gain market share that can help justify the costs of moving down a node, and then scale the design down. Ubicom, a 12-year-old startup that has hit its stride with consumer-targeted network access chips, is currently making the jump down to 90 nanometers from 130 nanometers. Such a shift can cost up to $10 million, but the increased speed can be worth it. Startups may be abandoning Moore's Law, but they're still going for speed — just more slowly.