Soured on Components?

I got an email from a tech entrepreneur with deep experience in silicon and imaging today: “Uh oh, even Matthias Wagner is getting dubious about components?  In that case, the venture guys must be really down on components!

My response:

On the contrary– I love components!  However, they don’t always make good early-stage investments [have been meaning to start a rather sparse list of novel component startups that were successful early-stage investments].  Or rather, the way these investments are done often causes them to be bad investments for the first guys in (including the founding team).  I see the same pattern repeated over and over:

  • Interesting core technology, multiple potential markets.
  • For sake of raising VC, focus on the biggest, fastest-growing market.
  • Because you need to move fast, you hire a complete team from chip to systems to sales to several VPs.
  • Burn a ton of money very quickly.
  • Core component/materials take 5x longer than the initial optimistic estimate.
    • Any more than the 2-3 engineers working on this core piece won’t speed it up.
  • Cut your team down.  If you’re lucky, raise a Series B at a crushing down valuation.
  • Refocus on a less ambitious first market, just to ship something.
  • If lucky and stingy — and the team is still motivated– live to see another day.
I guess VCs and entrepreneurs have to understand the chain of risks with the core technology [the types of failures are almost predictable, because every new device seems to hit them], and agree to a smaller initial “launch market” where you can prove a very simple version of your platform.. even if the headline numbers look a lot smaller.
[From recent conversations with component VCs left standing in the Boston area, I think a new lifecycle model is emerging that addresses this.  However, whenever a venture gets “hot,” discipline goes by the wayside and A-rounds escalate.]

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