Trade shows survive despite the Internet, although the Internet has eaten their original rationale of distributing information. There's just something about listening directly to a speaker that's hard to duplicate online, even for techies.
So I spent a week at the Embedded Systems Conference (a CMP event) in Boston last fall, listening to folks explain what they've learned. As always, I listen for what's not being said and how the audience reacts: Sometimes, silence and mutters can be rather informative.
What VCs Want
I sat in on the Disruption Zone lunch meeting between venture capitalists seeking The Next New Thing and entrepreneurs pitching their products and companies. This event resembled nothing so much as business-class speed-dating: Make your case in five minutes flat before a very critical audience. Much to their credit, the organizers imposed a strict time limit regardless of PowerPoint progress.
Essentially by definition, venture capitalists are only in it for the money, so they're naturally attracted to business opportunities that maximize their return. The introductory speeches clarified two points, if only by what was left unsaid: The entire embedded-systems market represents such a small opportunity that it's essentially irrelevant and these VCs see no way to make money from open-source/free software projects.
In round numbers, the entire embedded-systems market, whatever that means, offers at most a few tens of billions of dollars in revenue. While that's big money for me, it's just slightly more than the American pet food market and perhaps a factor of five larger than global ringtone sales. Worse, because embedded systems companies have the cottage-industry mentality common to tech-based biz in general, there's no single dominating company.
The ideal VC opportunity, the Next New Thing, must promise two decimal orders of magnitude return on their investment: Put $1 in, get $100 out. That requires creating a market where none exists, convincing customers that they must buy the product, building a company around that product, and then fending off competitors drawn by the frenzy. Fairly obviously, few embedded-systems business plans come close to that goal.
The next level, Disruptive Technology, can provide one order of magnitude return by eliminating inefficiencies, side-stepping roadblocks, being on the right side of regulatory controls, or otherwise innovating an existing business. Essentially everyone claims to offer disruptive technology these days, but, from what I can see, the bar is set rather low.
The lowest level, Buyout, must yield a binary order of magnitude return for merely buying a company, tarting it up or flensing some flab, and flipping the result to another buyer. A buyout can be easy, cheap, and low-risk, but it tends to chew up tech-class employees who see their company changed beyond recognition as it makes someone else rich beyond their wildest imaginings.
One chart showed that software now accounts for half of total product cost, which implies a strong motivation to somehow get that unruly mess under control. Worse, forecasts show code size increasing at a 46 percent compound annual growth rate against staffing at 14 percent. That's obviously not a sustainable situation: Five years from now twice as many developers must produce seven times more code.
As I see it, the bottom-line reason that VCs avoid embedded-system and, most likely, small software companies boils down to the fact that there's no economically viable solution to the software problem. They can't hire enough code monkeys (even Over There), nobody has a silver-bullet tool or technique, and analysis products simply add more cost to an already expensive part of the problem.
Depressing news, to be sure, but that's how it looks from their side of the desk. At least they're realistic, which is more than I can say for some folks.
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