SMALL FORM FACTOR FORUM
Small Form Factors Forever
COLIN MCCRACKEN & PAUL ROSENFELD
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Did you hear about the hot venture-funded embedded board startup? No? Not surprised. There isn’t one. Hasn’t ever been one. While several embedded board companies have made it to the ranks of public companies, the embedded board (small form factor) market is populated by small, owner-managed companies—many with a track record of success, or at least sustainability over ten to twenty years or more.
Why? It’s not what you might think. It’s not the lack of interest in the business-to-business technology sell. There have been plenty of hot companies in the semiconductor and embedded software (read RTOS) businesses. Those companies have one significant advantage over the embedded board market—they sell a substantial amount of product for use in high-volume consumer electronics. Embedded board companies slog away with many low to medium volume customers in military, medical, transportation, instrumentation and general industrial applications. And it takes a ton of them to make a big company. Even worse, the support costs eat up much if not all of the profit for the smallest of customers.
Embedded board companies live under a kind of “glass ceiling” that has nothing to do with race, gender or creed. It is based on customer volume—that magic line beyond which the OEM finds it cheaper to design the board in house and build at a contract manufacturer. There are no secrets or intellectual property barriers that prevent virtually any OEM from going this route. Standard time-to-market and lifecycle arguments aside, there is a point beyond which OEMs will simply not consider an off-the-shelf board purchase.
We can argue about where that point is till the cows come home. It’s different for every OEM and every application. The meteoric growth of the Computer-on-Module market over the past decade has shifted this line to higher volume levels (opening up dozens of new opportunities that would have gone custom)—but has not eliminated it. COMs allow an OEM to buy the generic CPU components off the shelf while developing custom I/O on a carrier board. CPU prices in this arena get down and dirty very fast. We spent years going goo-goo-eyed at potential 10,000-unit deals only to watch the deals fade with a puff of smoke as the OEM realized the financial equation required a custom solution.
A typical company serving the small form factor board market has somewhere between 500 and 2000 customers buying an average of 10 to 25 boards each per year. In a good year, sales can grow 10-15%. In a bad year, sales can decline 10-20%. Customers take one to three years to develop systems based upon new board products, with trials, certs and so on. Not the kind of profile to attract venture capital or stock analysts. What this profile does attract is a set of solid, creative entrepreneur/engineers who made a commitment to this business and have stuck with it over the years.
So we’re missing the glamour associated with cell phones, plasma TVs or even the Android operating system. We suffer through quizzical looks when we explain to our spouses or friends that we supply computer technology for embedded equipment. None of us is going to get rich in the sense of a Steve Poizner or Meg Whitman. (Although at least one of our colleagues ran for Governor of California before they did.) If you spend your career addressing the embedded market, you get up and go to work every day because it’s just damn fun. Veterans in this business can rattle off their favorite five or ten applications over the years. Equipment, ranging from blood analyzers to unmanned airborne vehicles, just couldn’t exist without the products that the small form factor suppliers bring to the table.
We offer a special salute to the half dozen or so individuals who created the small form factor business by founding their companies over twenty years ago, and who don’t have much to show for all their work except well-deserved pride in what they’ve accomplished and perhaps a pretty nice standard of living for their families. For, just as investors are hard to find to do a small form factor embedded board start-up, buyers with sufficient cash and a fundamental understanding of the business are also rare when it comes time to hang up the spikes. ESC is always a shock as we see a few more grey hairs and a few more wrinkles as the veterans in this business age. However, I expect we’ll be seeing many of you for many more years to come. Sure as the sun will rise, this market ain’t goin’ away.